QUESTION ONE - In your experience, what are the key considerations that international clients should have the front of mind when assessing a target company for acquisition in your jurisdiction?
Tax considerations affecting the transaction are very important.
The tax implications arising out of share purchase deals are different from a merger scenario or asset transfer, and each one may be more advantageous depending on the circumstances of the transaction. Therefore, parties should discuss possible acquisition scenarios in detail, in order to find the most beneficial tax structure.
The financing of the transaction always plays an important role in such deals. Buyers should always plan the financing of the acquisition and post-acquisition process by taking into consideration the debt-equity structure of the target company.
Parties are also highly recommended to execute a letter of intent or memorandum of understanding to set the framework of the current negotiations. Fully understanding the purchase price mechanics, before engaging in a costly due diligence processes, is crucial. Parties should also try to have binding confidentiality provisions and exclusivity provisions in such agreements to ensure the confidential information of the parties are not disclosed and to prevent the counterparty from engaging in negotiations with third parties.
In Turkey, M&A deals are, not specifically subject to regulatory approvals, however the proposed transaction may be subject to the Turkish Competition Board’s approval depending on the turnover of the buyer, the seller and the target company. M&A activity in some regulated sectors is also subject to approval by governmental authorities, such as energy, education, telecommunications, banking, financial services and insurance. Parties should carefully asses the requirements for such clearances and approvals.
In many cross-border acquisitions, the buyer may not be fully familiar with the local market and the corporate culture of the target company. Therefore, one of the other consideration points is that parties should plan the post-acquisition and harmonisation process and build up a management team that is also familiar with the local market and with the corporate culture of the target company. It is recommended to have a detailed and carefully structured post-acquisition transition plan regarding corporate culture.
QUESTION TWO - How would you, as a professional advisor, approach the due diligence process to ensure all bases are covered prior to a sale price being agreed?
Proper due diligence should determine all the risks of a proposed acquisition, by addressing the past, present and predictable future of the target company. Buyers should always conduct detailed financial, tax and commercial due diligence in addition to legal due diligence, in order to assess the exact value of the target company and the effects of the acquisition.
Having a detailed due diligence checklist and questions list which address all the legal risks is very important. While we are conducting due diligence, we are always trying to have regular meetings with the management of the target company and do on-site visits (even if the documents are uploaded to a virtual data site) to get a sense of how things work in the target company. We also try to schedule face-to-face meetings with relevant departments in order to make sure we are receiving the right answers for our queries.
Some of our work includes the review of corporate records, including share ledgers and certificates and reports regarding share capital, employment agreements, litigation files, real estate, intellectual and industrial property and the relevant records of the target company.
Antitrust, environment or privacy law-related matters are generally overlooked during the due diligence process, but we are always trying to fully assess the target company’s compliance with all applicable laws. We also review the financial statements and tax records of the company, and other due diligence reports, to assess the risks which may arise from there. We also determine all the regulatory approvals needed to be obtained for the closing of the transaction to prepare our clients for such processes.
Before circulating the Share Purchase Agreement (SPA) with the counterparty, we take comments from the other advisors of the acquirer, including commercial, financial and tax advisors.
QUESTION THREE - Once an acquisition is agreed, what are the key clauses or warranties and indemnities you would recommend for inclusion in the sales contract?
The transfer of shares does not automatically provide warranties in relation to a target company and the parties should insert a separate representation and warranties section in the acquisition documents. Representations and warranties are the centres of M&A deal negotiations.
Indemnity clauses in relation to the title/ownership of sale shares are recommended, alongside financial statements and taxes if possible. Such indemnity clauses should capture any possible breaches. Representations and warranties regarding the disputes/litigation, employment, taxes, compliance with laws (including environment and data protection legislation) and any undisclosed liabilities are also very important.
Sellers should always try to insert knowledge and materiality qualifiers in the acquisition documents and use wording such as ‘to the best knowledge of the seller’ or ‘ordinary course of business’ or materiality threshold in the representations and warranties to decrease their exposure in a possible dispute.
Buyers should always try to remove such limitations from the representations and warranties.
The SPA should also include a non-competition and non-solicitation provision if the parties do not execute separate shareholders’ agreement.
In many deals, a buyer usually pays a fixed purchase price on the date of closing, however, this is quite risky from a buy-side perspective. If the company to be acquired incurs losses after the signing of the SPA and before the closing, the buyers will bear such losses. Since the buyers are merely estimating the exact value of the company and entering the transaction by relying on the representation and warranties of the sellers, it is highly recommended to also include a purchase price adjustment clause in order to mitigate the risks.
Tips for completing a successful cross-border acquisition
Applicable laws, regulatory approvals, export laws, industry-specific regulations and accounting standards may be different in each country depending on the jurisdiction of the target company. Buyers should ensure they have a full understanding of the local laws and accounting standards before proceeding to acquisition.
Small to medium-sized companies and their management may not be familiar with the global standards of M&A documentation. Assuming the role of ‘drafting party’ to control the drafting of the agreement is crucial for both sell-side and buy-side. Drafters can set the framework of discussions and discussion points.
Parties are recommended to structure the deal by considering the tax implications of the acquisition. Finding the most efficient structure from a tax perspective helps to avoid double or over taxation. After considering the tax scenarios, the parties may decide on the structure of the transaction, i.e. transfer of shares, asset transfer, merger or spin-off.
This excerpt was taken from the IR Global Guide: International Deal Making: Assisting Acquirers. To view the full publication, please click here.