When it comes to participating in mergers and acquisitions (M&A) deals, investors face the challenge of making strategic decisions, particularly in selecting the forms of transactions. This decision goes beyond mere buying and selling of shares or assets; it is a legal decision that profoundly impacts the success of the deal and the future of the company. So, what are the common forms of transactions in the current M&A market, and what advantages or potential risks do they bring?
I. Legal Framework
- Law on Investment No. 61/2020/QH14 issued by the National Assembly on June 17, 2020 (“Law on Investment 2020”);
- Law on Enterprises No. 59/2020/QH14 issued by the National Assembly on June 17, 2020 (“Law on Enterprises 2020”);
- Law on Real Estate Business No. 66/2014/QH13 issued by the National Assembly on November 25, 2014 (“Law on Real Estate Business 2014”);
- Civil Code No. 91/2015/QH13 issued by the National Assembly on November 24, 2015 (“Civil Code 2015”);
- Decree No. 01/2021/NĐ-CP issued by the Government on January 4, 2021 (“Decree 01/2021/NĐ-CP”);
- Circular No. 219/2013/TT-BTC guiding the Law on Value Added Tax and Decree 209/2013/NĐ-CP issued by the Minister of Finance on December 31, 2013 (“Circular 219/2013/TT-BTC”); and
- Circular No. 111/2013/TT-BTC guiding the Law on Personal Income Tax and Decree 65/2013/NĐ-CP issued by the Minister of Finance on August 15, 2013 (“Circular 111/2013/TT-BTC”).
II. Definition
M&A stands for Mergers and Acquisitions, which refers to the activities of buying and merging businesses. In practice, the two concepts of “merger” and “acquisition” often go hand in hand, but the main difference between them lies in the way companies combine and the legal consequences after the transaction is completed.
Acquisitions occur when a company acquires a portion or all of the shares (for joint-stock companies) or capital contributions (for limited liability companies) or acquires the assets of another company. Usually, larger companies acquire smaller companies, and this transaction usually does not result in the creation of a new legal entity.
Mergers occur when one or more companies (referred to as merging companies) merge into another company (referred to as the receiving company) by transferring all assets, rights, obligations, and legal benefits to the receiving company, while terminating the existence of the merging company (Article 20 Law on Enterprise 2020).
III. Choosing common transaction forms in M&A deals
1. Common transaction forms
Currently, there are two prevalent forms of M&A transactions that investors consider when participating:
Purchasing shares (for joint-stock companies)/capital contributions (for limited liability companies): In this form, the buyer acquires shares or capital contributions in the target company from the shareholder or capital contributor. The objective is to acquire the target company itself, rather than solely its business system. By acquiring shares or capital contributions, the buyer gains ownership of the company. After completing the transaction, all assets of the target company remain under the ownership of the buyer, and only the ownership structure of the company changes.
Purchasing assets: In this form, the buyer purchases the assets of the target company. These assets typically encompass all or nearly all assets used for the company’s business operations, including land use rights, buildings, warehouses, machinery, equipment, and intangible assets such as trademarks, patents, and copyrights. It is worth noting that the assets traded may be limited to those utilized for a specific department or business area of the company. After the assets are sold, the seller retains ownership of the company.
While these two forms are common, it is important to acknowledge that M&A transactions are not limited to them. A third form known as the merger or consolidation of businesses also exists. However, mergers or consolidations can be regarded as a “special” procedure of share purchase or capital contribution transactions. Because, in such cases, parties must consider the shareholding or capital contribution structure and calculate the conversion plans and ratios to exchange corresponding shares or capital contributions in the target company.
2. Factors influencing the choice of M&A transaction forms
When contemplating participation in an M&A transaction, each party meticulously evaluates various factors that impact the M&A process. Typically, 04 (four) fundamental factors are taken into consideration:
(i) Commercial purpose: The implementation of M&A bears significant commercial implications for the parties involved. Each party possesses its own specific commercial purpose when opting to engage in an M&A deal. This purpose varies depending on the circumstances and objectives of each party. For instance, parties often choose the share purchase or capital contribution form when the seller intends to depart from the company or seeks a partner willing to share their “control” rights to leverage the buyer’s financial resources or business capabilities for mutual development. On the other hand, the asset acquisition form is favored when the buyer is solely interested in a specific business area or when the seller does not intend to sell the entire company.
(ii) Legal aspects
Firstly, the conditions for subjects and market access when participating in M&A vary in each country. The laws of each country establish specific criteria for determining foreign investors in M&A deals and impose restrictions on investment sectors, capital, and the allowable ownership of shares in share purchase, share transfer, or capital contribution transactions.
Secondly, the full implementation of procedures related to competent authorities is necessary for M&A transactions. Compliance with the law is crucial in various aspects, particularly in foreign exchange management. This includes controlling foreign investors’ investment, share purchase, transfer of shares, or capital contributions in domestic companies, as well as the receipt and use of dividends and profits, purchase of foreign currency for fund transfers abroad, and other related activities.
Thirdly, there is a lack of tight and clear legal aspects related to post-M&A management. Parties cannot be certain legally that they can agree to carry out post-M&A procedures, such as adjusting licenses, ownership rights to assets, and governance rights through agreements like Shareholders’ Agreement, Members’ Agreement, or Amended Charter with “innovative” terms.
(iii) Taxes
The tax factor, especially the tax costs, can also pose an obstacle for parties when deciding on an M&A transaction form. If only considering this factor, the share purchase form (for joint-stock companies) or capital contribution form (for limited liability companies) is often preferred by sellers. This is because these forms offer more tax advantages. For example, according to point d, clause 8 of Circular No. 219/2013/TT-BTC, shares or capital contributions are not subject to value-added tax. Additionally, according to point b, clause 2 of Circular No. 111/2013/TT-BTC, individuals transferring shares are only subject to a tax rate of 0.1% for personal income tax. Moreover, compared to the asset acquisition form, the share purchase form involves a lesser number of complex invoices or documents.
(iv) Time
Considering the time factor in determining the level of priority and “waiting” for completion of the transaction is also crucial for parties when choosing an M&A transaction form. If time is a priority, the share purchase direction is considered more favorable than the asset acquisition form. This is because asset acquisition requires the completion of numerous procedures and may result in a temporary halt in operations. Conversely, while the share purchase activity may take a significant amount of time in the due diligence stage, the time to complete procedures is relatively fast, flexible, and does not adversely affect business operations.
3. Comparison between share/capital contribution acquisition and asset acquisition based on (04) four influencing factors
|
Factors
|
Share/capital contribution acquisition
|
V
|
| Commercial purpose |
Seller’s decision to discontinue business or Buyer’s desire to acquire the entire target company
Seller’s willingness to share control of the company and seek suitable partners
|
Buyer only interested in specific business areas of the target company
Seller’s unwillingness to sell the entire company
|
| Legal aspects |
Minimizing restrictions on land ownership for foreign investors (Article 11 Law om Real Estate Business 2014)Indirect ownership of all assets, licenses, and official approvalsBuyer inherits all responsibilities and obligations proportionate to the shares/capital contributed in the transaction |
Buyer does not inherit any obligations or responsibilities related to assets
Performing procedures for reissuing/modifying/updating/supplementing licenses
|
|
Taxes
|
Beneficial tax rates
Assuming the financial obligations of the target company
|
High taxes and complex invoicing
Not liable for the financial obligations of assets except taxes
|
|
Time
|
Due diligence procedures may take more time;No impact on business operations |
Time-consuming due to separate and complex procedures
Disruption of business operations
|
IV. Conclusion
In summary, whether it is purchasing shares (for joint-stock companies) or capital contributions (for limited liability companies), or purchasing assets, each approach has its own benefits and risks. Therefore, investors need to carefully consider and thoroughly evaluate their options in order to make an informed choice that not only brings immediate benefits to the business but also creates opportunities for sustainable development in the future.
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