Structure and process, legal regulation and consentsStructure
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
Typically, a contract, referred to as a purchase agreement, is executed between the relevant parties to acquire or dispose of privately owned companies, businesses or assets. A privately owned company can also be acquired through a merger pursuant to a merger agreement in accordance with the law of the state of incorporation of the company (see question 2).
The process of acquiring a company, business or assets will often turn on the complexity of the issues and number of parties involved, as well as whether the transaction involves a bilateral negotiation or a controlled auction process with multiple potential buyers.
An auction process in which interest from several buyers is solicited will typically involve:
- drafting an information memorandum as the basis of marketing the company, business or assets, and drafting a purchase agreement and other sale documents (approximately six to eight weeks);
- ‘round one’ expressions of interest from potential buyers who will then be permitted to undertake due diligence (approximately four weeks);
- ‘round two’ offers by potential buyers with mark ups of the transaction documentation (approximately four weeks); and
- negotiation of transaction documentation with one or more buyers until definitive terms are agreed with one party (up to two weeks).
The larger and more complex the target company, business or assets, the longer each phase of a process can take. Up to three months will often elapse between distribution of an information memorandum and execution of definitive transaction documents. A bilateral transaction can take longer to complete owing to the lack of competitive tension in the process.Legal regulation
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
Parties to acquisitions and dispositions generally elect to have purchase agreements and other transaction documentation governed by Delaware or New York state law. Mergers are effected in accordance with the corporate laws of the states of incorporation of the constituent corporations. Under most states’ corporate statutes, a company can be acquired by way of merging the buyer or one of its subsidiaries into the target resulting in the buyer becoming the owner of the target by operation of law once the statutory merger requirements have been satisfied and the target shareholders being entitled to the sale consideration for their former target shares. Usually, a merger can be effected with the approval and recommendation of the target company’s board of directors and the approval of holders of a majority of the target’s outstanding voting equity. There are also a range of federal and state statutes and regulations dealing with the transfer of employees, title to property, data protection, pensions and competition that are relevant to private acquisitions and disposals.
Although most sales of US companies will be governed by Delaware or New York law or the law of another US state, it is possible for acquisitions or dispositions to be governed by the law of a foreign jurisdiction. However, parties to a transaction will be required to comply with legal formalities applicable to the transfer of shares and assets and liabilities that are subject to local law.Legal title
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
The mechanism for transferring legal title to an asset in the US varies depending on the nature of the asset being sold and certain other factors. By way of example:
- title to certificated equity interests is often transferred pursuant to a simple transfer document and the physical transfer of any certificates representing those interests from seller to buyer. If equity interests are uncertificated, title can transfer in several different ways depending on the entity involved and its organisational documents. Specifically, for certain US companies, the transfer can be effected by book entry with the share registrar for the issuer, whereas in a sale of interests in a partnership or limited liability company, the transfer of title is often documented by an amendment to the underlying partnership or limited liability company agreement reflecting the updated capitalisation and ownership table pro forma for the sale transaction;
- if real estate is being sold, legal title is often transferred pursuant to a transfer document and the physical transfer of any deed or title to the relevant property from seller to buyer; and
- if personal assets are being sold, then transferring ownership of the property is often reflected in a transfer document along with the physical transfer of possession of those assets from seller to buyer. In the case of most personal assets, there is no title representing ownership of the property, but there are exceptions to this general principle (eg, vehicle sales).
Generally, the transfer of ownership is effected in the manner described above and does not occur by operation of law, except in the cases of acquisitions of companies by way of state law mergers (see question 2).
It can be possible for there to be a difference in the US between legal and beneficial title in certain instances, so buyers of assets in the US should be careful to document the acquisition of both legal and beneficial ownership of those assets accordingly.Multiple sellers
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
Generally, the sale of a US company is effected by way of either a direct purchase of the equity of the company from its shareholders (often called stock deal) or pursuant to a merger. If a US target company is owned by multiple sellers and the sale transaction is structured as a stock purchase, then the consent of all of the shareholders in the target would be required to sell the company. Often, buyers of US companies will seek to structure a transaction in this manner (particularly if there are not a large number of target shareholders), as a buyer will usually prefer to be in privity of contract directly with the selling parties. However, in transactions where the equity ownership of the target is widely dispersed, parties often structure the sale of a US company by way of a state law merger (see question 2). Any shareholders who object to the merger and otherwise follow the statutory requirements may be entitled to seek a judicial appraisal of their shares. Otherwise, the minority shareholders in a US company can be ‘squeezed-out’ in the merger with their shares converted into the right to receive the sale consideration prescribed by the merger agreement.
In addition to the above, in many private companies (particularly those with private equity or venture capital investors), it is fairly customary for the holder or holders of a majority or a specified percentage of the outstanding capital stock to have drag-along rights in any shareholders’ agreement or organisational documents for the company. These rights entitle such holder or holders to compel minority shareholders to cooperate with, and vote in favour of, the sale of the company, and not to exercise any statutory appraisal rights to which a shareholder might otherwise be entitled.Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
As a matter of New York or Delaware contract law, a buyer can generally choose which assets and liabilities it will acquire in a transaction that is structured as an asset sale. However, the doctrine of ‘successor liability’ may result in liabilities of the seller transferring to the buyer by operation of law, even if the buyer and the seller have agreed between themselves that such liabilities will not transfer. Successor liability may be more likely to apply with respect to specific types of liabilities, such as environmental clean-up liabilities, products liability and employment liabilities. In circumstances where liabilities transfer to the buyer by operation of law, buyers may seek contractual indemnities from sellers for such liabilities.
The transfer of assets or liabilities often requires third-party consents, such as a landlord’s consent to the assignment of a lease or a counterparty’s consent to the assignment of a commercial contract. Governmental consents are typically not required, except for consents that are applicable to transactions regardless of structure (see question 6).Consents
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
Under the US antitrust laws, if the value of the transaction exceeds US$90 million, a filing will generally need to be made with the US antitrust authorities under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). The waiting period required under the HSR Act must expire or be terminated prior to completion of the transaction. The waiting period is generally 30 days from filing, but may be terminated earlier by the US antitrust authorities if requested by one or more parties, and may be extended substantially in circumstances where the antitrust authorities require additional information to complete their review of the transaction. The US antitrust authorities have the authority to require divestitures or other remedies to address any antitrust concerns, or to block the transaction altogether, subject to certain appeal rights of the parties.
Transactions in regulated industries (eg, banking, telecommunications and energy) must often comply with special regulatory regimes particular to transactions in these industries. Typically, approval of the relevant federal or state governmental agency is required before transactions in these industries may be completed.
In general, the US does not prohibit foreign investment in US companies, although statutes prescribe conditions for foreign direct investment in certain protected industries, including mining, marine transportation and communications. Moreover, the Committee on Foreign Investment in the United States (CFIUS or the Committee) has the authority to review acquisitions of US companies by non-US persons. Until legislative amendments in 2018, submission of a transaction for review by CFIUS was voluntary, with CFIUS retaining the power to initiate a review of any transaction not voluntarily submitted. The Foreign Investment Risk Review Modernization Act (FIRRMA), enacted In August 2018, imposes a legal requirement that certain categories of investment be submitted to CFIUS for review. Failure to notify CFIUS of a transaction subject to mandatory filing can result in civil penalties up to the value of the transaction. FIRRMA introduced the concept of an abbreviated ‘declaration’ in mandatory cases or, subject to regulations that have not been finalised as of this writing, in other circumstances. In addition, under FIRRMA, certain non-controlling investments in US companies are now subject to CFIUS review. CFIUS may, as a condition for clearing a transaction, require structural or behavioural remedies to mitigate national security concerns, including compelling divestitures or imposing extensive changes in corporate governance at the acquired entity. If CFIUS believes that the national security risks posed by a proposed transaction cannot be adequately mitigated, it may recommend that the US president prohibit the investment.
Private companies often have contractual arrangements in place among their stockholders that can impose meaningful additional restrictions on the transfer of their shares or the entry into transactions, such as consent or veto rights, rights of first refusal or first offer and tag-along rights. These restrictions vary considerably and are generally a focus of a buyer’s diligence on a private company target.
Are any other third-party consents commonly required?
In the purchase of the stock of a private company, each stockholder will need to agree to transfer its shares in the absence of contractual drag-along rights (see question 4). Thus, for a target company with multiple shareholders, buyers often prefer to use a merger structure (see questions 2 and 4). In addition, many states, such as Delaware and New York, require a shareholder approval if a significant portion (such as all or substantially all) of the assets of a company are sold.
Contractual counterparty (such as landlord) consents may be required in connection with assignments of contracts on an asset sale and, depending on the wording and governing law of the contract, can also be required in connection with a merger or other change of control transaction.Regulatory filings
Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?
See question 6 for details of governmental approvals and filings. In order to consummate a merger, a merger certificate will be required to be filed with the applicable secretary of state, and typically any unpaid franchise taxes will need to be paid prior to closing. The transfer of certain assets (eg, land) and licences or intellectual property (IP) rights may require formal recording, but this varies widely from state to state.