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Additional reading. A lecture on legal aspects of acquisition. Do the task. Decide whether the statements are true (t) or false (F).
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ADDITIONAL READING
Text 1
A LECTURE ON LEGAL ASPECTS OF ACQUISITION
…I would like to start with a few comments on how to decide if your business is ready to undertake an acquisition. Then I’ll deal with the issue of making the right choice, that is, choosing a target. After that, I’ll discuss the process of assessing the target business, which involves gathering financial information, like looking at trends in sale and profit margins, for example.
In this section of my presentation, I’ll be addressing the main legal issues which arise at different stages of the acquisition process, which require separate and sequential treatment. That’s say, they have to be done in the proper order. First, I’ll tell you about the due diligence stage, and then we’ll look at the deal stage.
What is due diligence? Generally this term is used to refer to the careful professional scrutiny of the assets and liabilities of a company, usually in preparation for an acquisition. It is the process of uncovering of all liabilities associated with a firm. It is also the process of checking if the claims made by the seller of the target business are correct. You should know that directors of companies are answerable to shareholders for ensuring that this process is properly carried out.
For legal purpose, there are several things that must be done in the course of due diligence. First, you have to obtain proof that the target business owns the key assets such as property, equipment, intellectual property, copyrights and patents. Another thing that you should do is to get the details of past, current and pending legal cases. Look at the contractual obligations that the business has with its employees (including pension obligation), as well as contractual obligations with customers and suppliers. Here, one has to think about any likely or future obligations. It is also important to consider the impact that a change in the ownership of the business may have on existing contracts. Due diligence is routinely conducted by lawyers.
Now let me move on to the deal stage. When you are considering general terms of a potential deal, you’ll probably look for certain confirmations and commitments from the seller of the target business. These’ll provide the level of comfort about the deal. They’re also indications of the seller’s own confidence in their business.
A written statement from the seller or buyer that provides assurance of a key fact relevant to the deal is known as a warranty. You may require warranties with respect to the business’s assets, the order book, debtors and creditors, employees, legal claims and the business’s audited accounts. A commitment from the seller to reimburse you in full in certain situations is known as an indemnity. You might seek indemnities for unreported tax liabilities, for example.
Do the task.
Decide whether the statements are true (T) or false (F).
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1. The speaker’s aim is to inform the business owners what they can expect if they decide to carry out an acquisition.
2. The speaker will touch staffing issues after an acquisition.
3. The important legal steps that must be carried out in the course of the acquisition process can be completed in any sequence.
4. ‘Due diligence’ refers to the process of gathering and analyzing financial information and other relevant information about a business before it is acquired.
5. One aspect of due diligence is verifying ownership of intellectual property.
6. In the course of due diligence, the acquirer should terminate all of the target company’s contracts with suppliers.
7. A warranty is a written statement by a party attesting that a fact relevant to the deal is true.
8. The target may provide indemnities to protect the acquirer against future liabilities.
Text 2
SPIN-OFFS
The term 'spin-off refers to any distribution by a corporation to its shareholders of one of its two or more businesses. Sometimes the spun-off business is transferred first to a newly formed subsidiary corporation. The stock of that subsidiary is then distributed to the shareholders of the distributing corporation. Other times, the stock of a pre-existing subsidiary is distributed.
Spin-offs can include distributions on a proportional basis (i. e. pro rata), in which the receiving shareholders do not give up any of their stock in the distributing corporation when they receive the spun-off stock. Sometimes the distribution only goes to certain shareholders. In this case, the receiving shareholders give up some (or all) of their stock in the distributing corporation in exchange for the stock of the controlled subsidiary. Non-pro-rata spin-offs are sometimes referred to as 'split-offs'. A non-pro-rata spin-off that results in one group of shareholders holding all the stock of the distributing corporation and a second group holding all the stock of the former subsidiary corporation is referred to as a 'split-up'.
A spin-off is used to separate two businesses that have become incompatible. In a case where investors and lenders may want to provide capital to one but not all business operations, a spin-off can be a good solution. Spin-offs are also used to separate businesses where owner-managers have different philosophies. Spin-offs may furthermore be used by publicly held companies when the stock market would value the separate parts more highly than combined operations. The separation of business operations could also lead to a greater entrepreneurial drive for success.
The tax characteristics of a qualifying spin-off under Internal Revenue Code Section 355 make this an attractive tool for solving certain corporate challenges. Without Section 355, the distributing corporation would have to recognize a gain on the stock it distributed as if it had sold that stock. In addition, shareholders receiving the distribution would be taxed on the shares received, either as a dividend or as capital gain. This double tax usually makes spin-offs extremely expensive. Code Section 355 permits a spin-off to be accomplished without tax to either the distributing corporation or to the receiving shareholder. Any gain realized by the shareholder is deferred until the stock is sold.
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