July 25, 2021

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A brief study of different M&A transaction structures

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Image source: https://corporatefinanceinstitute.com/resources/knowledge/deals/ma-acquisition-deal-structure/

This article has been written by Nishish Mishra, pursuing a Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.

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Companies have been merging with and acquiring each other for hundreds of years. However, in our modern economic state, such transactions have become more significant and more complex than before. Mergers and acquisitions are financial transactions with variable structures, processes, timelines, and outcomes. These transactions are critical to healthy corporate finance and understanding the necessary components of mergers and acquisitions is as well. Below I have analyzed and consolidated the deal structures which will help lawyers and corporates to decide on a suitable structure as per their transactional needs.

Acquisition of business is crucial to help a business expand in size or in a territory and to assist a business in diversifying risk. While a major aspect of the acquisition is the manner of funding the acquisition; ensuring the smooth and cost-effective transfer of the transferee company is also important to the purchase of the undertaking. In this chapter, we explain the various routes of business transfer; the cost implications of each of the routes; and how to choose amongst the various routes of business transfer.

  1. Asset sale;
  2. Slump sale;
  3. Share sale
  4. Amalgamation; and
  5. Demerger 

Asset sale

As the name suggests, an asset sale is the itemized sale of assets of an undertaking in a bit-by-bit manner, where individual values are assigned to each asset. Since this route offers an itemized sale, the acquirer can choose the asset he wants to acquire and the existing liabilities he wants to take up. Companies usually opt for asset sale methods so as to clean up their balance sheets which are saddled with bad loans. With respect to the Indian scenario, many cases have been witnessed, including the Kingfisher case whereby the companies borrow loans from banks and later on they don’t repay them which makes it a non-performing asset. To recover those loans, banks often force the companies to sell their assets to repay their ballooning debts.

Slump sale

The slump sale, unlike sale, is the transfer of a business undertaking as a whole, on a ‘going concern basis. That is, there is a presumption in case of a transfer of this nature that the business entity will continue operations in the future and will not liquidate or be forced to discontinue operations due to any reasons. Slump sale happens when acquirers want to acquire the whole setup as it is, without acquiring the entity housing the business. In this case, the acquirer is not only interested in the assets, but in the whole processing unit. The operations would carry on as usual without much disruption but under the arm of the acquirer.

Share sale

As shares represent the complete underlying value of the assets and liabilities of the company, the acquisitions of shares are the most common manner of acquiring a company. Here, the acquirer is looking to secure the entity which houses the business as wall as the setup. Usually, when the target has made a name for itself in the market and has an established loyal customer base, acquirers will be looking to acquire the company as well as the business. 

Amalgamation

Amalgamation or a merger is a route of business transfer whereby the assets of two companies become vested in one company (which may or may not be one of the original two companies). Consequently, the amalgamating companies lose their individual existence and their shareholders of the new or amalgamated company. Usually, this happens as a part of internal restructuring where group companies are merged into the holding entity to reduce the administrative and compliance burden.

Demerger

In contradiction to an amalgamation, a demerger is a manner of hiving-off of a business or company through a court-driven process. A demerger involves the transfer of a business undertaking (which may include a unit or a business activity, taken as a whole) by a company, typically as a going concern. The resultant company or the transferee company, following a court-sanctioned demerger scheme, maybe a new company that needs to be incorporated or a company that already has a legal existence. Companies generally opt for demerger so as to provide a distinct focus on each of the businesses under the group. Moreover, one of the prime reasons for companies entering into the demerger process is that the parent company is unable to optimize the returns. Demerger also happens when the shareholders decide to unlock the value by demerging their core business into a separate entity. Amalgamation and demerger are largely undertaken for the restructuring of a group of companies as it is easy to obtain shareholders and creditor approvals., SEO, Wordpress Support & Insurance, Mortgage, Loans, Legal, Etc Blogs

The stamp duty implications for an asset sale, slump sale, share sale, demerger, and amalgamation are discussed below as follows;

Sr. no 

Type of transfer

Stamp duty implications

1

Asset Sale

The rate of stamp duty payable on the asset purchase agreement (APA) is state-specific.

2

Slump Sale 

The rate of stamp duty payable on the slump sale is also state-specific.

3

Share Sale 

The rate of stamp duty payable on the share sale is also state-specific and may be based on the values of shares sold.

4

Demerger

The rate of stamp duty payable on the demerger is state-specific.

5

Amalgamation

The rate of stamp duty payable on the amalgamation is also state-specific.

The tax implications for an asset sale, slump sale, share sale, demerger, and amalgamation are discussed below as follows;

Sr. no 

Type of transfer

Tax implications

1

Asset Sale

In the case of depreciable assets, the capital gains computed on a block of asset basis and the value over and above the aggregate of the written down value of the block of assets and expenditure incurred in relation to the transfer will be treated as the capital gains and subject tax as short-term capital gains.

2

Slump Sale 

Capital gains realized on the transfer of the undertaking, if held for more than 36 months, are taxed as long-term capital gains. If the assets are held for less than 36 months they are taxed as short-term capital gains.

3

Share Sale 

Capital gains realized on the transfer of listed shares if held for more than 12 months are taxed as long-term capital gains and if held for 12 months or less then it is taxed as short-term capital gains.

4

Demerger

No capital gains tax liability if it is a tax-neutral demerger, or if the transaction is covered under Section 47 of the Income Tax Act (ITA). Usually undertaken for restructuring of group companies.

5

Amalgamation

No capital gains tax liability if it is a tax-neutral demerger, or if the transaction is covered under Section 47 of the Income Tax Act (ITA). Usually undertaken for restructuring of group companies.

For any company looking to either merge or amalgamate, it is very necessary to look for the most appropriate, suitable, and most feasible scheme for itself so that it could complete the operation in the least possible time and more effectively. Planning proactively can help the companies save a lot of costs and may also help in containing and reducing the number of different compliances. Companies could also save a lot of time and the extra effort which could have otherwise arisen due to lack of proactiveness.


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