Legal News & Analysis – Asia Pacific – Singapore – Corporate/M&A

Companies can choose to grow internally by gradually expanding their business, markets, and employees. Another option is to acquire other businesses. When successfully implemented, acquisitions allow companies to speed up the growth process by giving them a business with an existing market, know-how, and employees.

Methods Of Acquisition

There are two main methods used for acquisitions:

• A company can acquire the business and assets of the target including its customers, know-know, and employees.
• Alternatively, it can acquire the majority or all of the shares of the target company.

The main differences between an acquisition of a company’s business and assets and an acquisition of a company’s shares are as follows:

Acquisition Of A Company’s Business 

• Only the assets that are specified will be acquired. The target’s liabilities are not acquired. The buyer will need to ensure that all assets that are needed for the continued operation of the business are included in the sale.
•  Each asset that is to be transferred has to be transferred either by physical delivery or by way of a documented transfer. If agreements (such as licensing or distribution agreements) are to be transferred, the consent of the other party will need to be obtained.

Acquisition Of A Company’s Shares

• The buyer acquires the entire company, its assets as well as its liabilities. This may later give rise to problems if the target has liabilities the that the buyer did not know about when it acquired the target.
• Only the shares of the target company need to be transferred. It will not be necessary to get the consent of third parties unless their agreements with the target company include clauses that terminate the agreements upon a change of shareholder/management control.

The Steps Involved In An Acquisition

After a company has identified a suitable company or business that it wants to acquire, it will need to reach an agreement for the sale with the owner of the company or business. Typically, a basic acquisition process will involve the following key steps when acquiring the business or shares of a private limited company:

• Structuring the deal: The basic aspects of the deal are worked out between the seller and the buyer. There will normally be a Term Sheet setting this out. The buyer will also enter into a Non-Disclosure Agreement agreeing to keep confidential all information learnt about the target company during the acquisition process.

• Due diligence: The buyer will carry out a thorough investigation of the business to ensure that he understands and knows what he is buying. This is also to ensure that he does not take on any liabilities that he does not want. The buyer’s lawyers will send a detailed questionnaire requesting information from the seller. On larger transactions, sellers may set up a data room containing information about the target for buyers to access. The buyer’s lawyers will then prepare a legal due diligence report for the buyer, highlighting any potential legal issues.
• Detailed terms of the sale: The parties will agree and negotiate the detailed terms of the sale. The buyer will want to get assurances and warranties from the seller about the company that he is buying. Where the due diligence has uncovered areas of risk for the buyer, the buyer and seller will want to negotiate who will bear the risk. This is usually done through a Disclosure Letter where the seller will qualify the warranties given in the sale and purchase agreement.
• Signing and completion: Signing and completion of the sale and purchase agreement often take place simultaneously. However, if third party consents or government approvals are required, completion may take place some time after the signing. Completion will then be made subject to the consents or approvals being obtained.

If the target company is listed on a stock exchange, the process is substantially more complicated than if the target is a private company. Companies listed on a stock exchange are subject to the exchange’s listing rules and to a code governing takeovers, which mandate certain formal requirements for the process of the acquisition.

For further information, please contact:

Rachel Eng, Partner, WongPartnership
[email protected]

Teck Howe Tan, Partner, WongPartnership

[email protected]

Kah Keong Low, Partner, WongPartnership

[email protected]

WongPartnership Corporate/M&A Profile in Singapore