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Commercial Financing and M&A

If you own your own business, one of the potential endgames is that you may someday sell it to another firm, buy another firm and add it to your own, or merge the two companies together.

Acquiring another company or merging two companies brings into play all kinds of rules and regulations about what is permissible and the processes you must undertake in order to do so.

Mergers and Acquisitions

Mergers and acquisitions law is a subsection of UK company law that is concerned with how companies consume and combine with each other.

It is important that these dealings are regulated strongly by law in order to ensure the fair treatment of those who hold shares in either company, as well as guaranteeing that competition in a market is not stifled by one vast company absorbing all potential rivals in order to establish market dominance.

For this reason, there are a wide number of regulations and pieces of legislation that relate to mergers and acquisitions

Mergers and acquisitions form a very important part of corporate finance. When a company takes over another company and clearly establishes itself as the new owner it is called an acquisition.

This can be done for a wide number of reasons, ranging from a large company planning to expand its operations into a field well dealt-with by a smaller company it can ,afford to obtain, to a business procuring a failing firm as they think that it has some amount of value to them.

Mergers on the other hand, are a situation where two companies decide to form a new company. A big concern in these cases is fair treatment of employees and ensuring that nobody with a stake in either company is ousted against their will or treated unfairly.

There are two main types of acquisitions.

Share purchase

The buyer buys the shares of the target from the shareholders. As the buyer is buying the shares in the target company, it is buying the company in its entirety and the buyer will get all of the target company’s assets, liabilities, rights and obligations.

Asset purchase

The buyer buys assets from the target company. The advantage of an asset purchase is that the buyer can ‘cherry pick’ the assets it wants and leave the assets and liabilities that it does not want.

Most acquisitions are of private companies or businesses, but if either buyer or seller is a public limited company then additional legal formalities need to be considered and complied with. This is especially so if the plc is listed on a securities exchange such as the London Stock Exchange or AIM.

Advantages of a Merger

There are many motives for any acquisition but the overriding objective should be to add value to the business. Motives could be:

  • Economies of scale – combining companies/businesses can reduce duplicate departments and/or operations therefore lowering the running costs of the business.
  • Increased revenue/increased market share – by buying a target which is a competitor of your business you could increase your business’ revenue and/or increase your business’ share in the market (however when buying a competitor you will need to ensure that the purchase is compliant with competition laws).
  • Diversification – either geographically or into different area in which the buyer does not already operate.
  • Cross selling – buying a business which is complementary to the products or services your company/business.

Mergers and acquisition law in the UK is primarily concerned with three main areas of corporate strategy:

Schemes of arrangement

A scheme of arrangement is an agreement between a company and either its shareholders or the people who lent it money which has to approved in a court of law. Schemes of arrangement allow a company to reschedule its debt, returns of capital and takeovers and the relevant provisions are found in the Companies Act 2006.


If a company is liquidated and its business assets are transferred to a new company, the old shareholders must receive shares in the new company of equal value. If creditors object they can be repaid during the liquidation process.

Takeovers or acquisitions

Acquisitions of one company by another must follow a strict set of regulations. Shareholders must be treated equally, information regarding the deal must be released, the bidder must announce their intentions and if the share price goes up as a result of an offer the offer must be raised to that price. A large number of people are involved in helping businesses to thrive and the law is designed to ensure that they all receive their due in such circumstances.

Legal Issues

There are numerous legal issues to consider in the process of an acquisition or a merger which may occur at any stage. These legal issues need to be dealt with carefully as there can potentially be large repercussions on your business.

Due diligence

An important part of the process to consider is the due diligence stage. This is the process of acting on all of the liabilities associated with the purchase of the new business, as well as verifying that all the claims made by the vendors are correct. We advise you seek a lawyer to conduct this process. The directors of the companies are responsible for carrying these out. For legal purposes it is important that you obtain details of past, current or pending legal cases as well as proof that the target business owns key assets such as property, equipment, copyrights and patients. You should also look into the business’s employment in terms of current and future contract obligations as well as contracts that may concern changes in ownership. The same should go for your suppliers.

Merger and acquisition deals

The next stage is the deal stage. When considering the terms of the deal you should seek certain confirmation and commitments from the person or people who are selling you the business to make you feel comfortable with the deal and give you enough assurance to go ahead with it. The seller will provide assurance in writing which is known as the warranty, which may also be required by the business’s assets, order book, employees, legal claims, audited accounts, debtors and creditors. It is also important to know that the seller can fully reimburse you in certain situations, which are called indemnity.

Cross-Border Regulations

Another legal issue you should familiarise yourself with is The Companies Cross-Border Mergers Regulations 2007. This provides regulations on mergers between UK and overseas companies. These regulations removed legislative barriers, making it easier for UK companies to merge with other companies within the European Economic area.

Seeking professional advice is advised to gain more information on these legal issues if you are still confused about certain areas.

Staff Issues

After an acquisition or merger staff cuts or changes often take place to increase efficiency. Efficiency is a very attractive feature of an acquisition or merger, but cuts and changes may have to be made in order to achieve it.

This causes potential problems and conflict, so if the staff in your business and the target business are involved in the process and are protected from uncertainty the process of the acquisition or merger will be smoother and generally easier to accomplish.

To achieve this you should consider how you can make sure staff are in the know but at the same time do not tell them too much. It is good to keep them informed to ease their uncertainty. It is also better to keep hold of your important and key staff which is normally done through offering incentives and bonuses for their work.

It is also best to keep your key staff involved in the due diligence process. It will also be good to get to know the important staff in the business and get to understand their skill set and what they are capable of. In the process of making the deal it would also be good to give the senior staff more responsibilities.

Information and consultation of employees regulations

Although it is up to whoever is acquiring or merging with another company to give as much information to the employees as they like, you must make sure you abide by the Information and Consultation of Employees Regulations.

These regulations require you to inform certain employees about certain aspects of the deal. The regulations also mean that if you have more than fifty employees and more than 10% of them request a system, you have to agree a procedure for informing and consulting them.

If you do not conform to the regulations and do not inform the employees even though there was an existing procedure, the employees have the right to go to the Central Arbitration Committee and state their grievance. If you are in the wrong you can receive a fine of up to £75,000.

Other staff problems

Other staff issues that are important to think about include how you can fill skill gaps, for example, and who, whether it be from your company or the other company, will fill them. You should also consider paying the differentials between the two companies and how to build the relationships and share knowledge between the two businesses. Other issues include; relocation, trade union matters and policies and procedures for the newly formed business.

Making a Merger Decision

When considering a merger or acquisition there are many factors that are important to consider. It is strongly advised to carry out thorough analysis and research to gain a good understanding of all the implications associated with the growth.

SWOT analysis in M and A

The most appropriate and common analysis you can carry out is a SWOT analysis. This analysis involves investigating the strengths, weaknesses, opportunities and threats of your business. This analysis is good because it covers all factors inside and outside the business.

Strengths and weaknesses are internal aspects of your company which will give you an insight into where exactly you can improve and build on to enhance the company. Threats and opportunities are still factors that affect your business but occur externally.

With a sufficient analysis of these you will be able to pinpoint what and who your threats are, which may include competition or changes in economy, for example. You will also gain useful information on what your opportunities are so that you can capitalize and gain an advantage in the market.

Gap analysis

Another analysis that will be helpful to carry out is called a Gap Analysis. This entails analysing your business at current its current position and then analysing what your goals are and where you want your company to be in the future. This will allow you to gain information to ‘bridge the gap’ and convert your strengths into achieving your goals.

Assessing economic conditions

It is very important to assess the external factors because future events and changes in the economic climate are going to have the biggest impact on your business in the future. A merger or acquisition may seem more than feasible at a present time but if the economic forecast is not favourable in the future then your business will run into financial difficulties in the long run.

If the economic climate seems like it will be beneficial to your company you still have to make sure you have the appropriate amount of finance to make the acquisition or merger.

Once you have carried out a suitable analysis and considered all factors that affect your merger or acquisition should have a clear idea of what to expect from the deal. You will find out if it supports your strategy and be confident that the deal will produce a high rate of return as opposed to investing internally.

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