Continuing from the previous article, this article will focus mainly on the Letter of Intent (LOI).
1. Identifying Parties and Target Companies:
It depends on the scheme, but in M&A deals, there are usually three parties: a buyer, a seller, and a target company. Then, in the case of a share transfer, the buyer and the seller are the parties; and the target company’s shares are the objects of the transaction. Therefore, the “Share Transfer Agreement” is one of the purchase agreements that are to purchase the shares as the objects. Since the LOI has the purpose to show intention to purchase, one needs to identify the objects of the transaction. Hence, in this case, it is enough to put a clause representing such as “We intend to purchase XXX shares of YYY company (which means XXX shares of the seller)”.
On the other side, in the case of a business transfer, the seller and the buyer will be the parties. Then, the business of the seller is the object. Since the business nature is different in every case, it is necessary to identify the object of the transaction more precisely than in the cases of share transfer. For example, “all the businesses that the Malaysian branch of the seller handles” or “a factory located in XXX, all the property in that factory, all the employees who work in that factory and all the clients of the sellers and the agreements between them.”, and so on. Even if one can’t identify the detailed business at the timing of the LOI, it is essential to try to identify as much detail as possible in the “Share Transfer Agreement” with an appendix which represents the objects of the transactions, such as the list of fixed properties, movable property, employees, clients, and so on.
2. Intention, Purpose, and Future Plan of Investment and Acquisition:
In LOI, the buyer specifies their intention of investment, acquisition, or plans after the transaction to the seller. Besides, it is common to specify the purpose or the reason for their investment or acquisition. As for the seller, it helps to identify how serious that the buyer is, or whether they have synergy after the transaction.
In the case of a 100% shares transfer, the buyer can manage the target company freely after the acquisition. As a result, some might think that disclosing their future plan to the seller is unnecessary. However, there is still a possibility that the seller doesn’t select a buyer who doesn’t comply with the seller’s intention, for example, they prefer to keep the regional employment, keep the concept of the existing facilities and so on.
The future plans after the investment can be more important for the seller if it is a partial investment. Because, in that case, the buyer and seller must corporate to manage the target company. Thus, if there are any critical differences in the plans, they need to discuss and resolve the problem because that is a risk of causing disputes about management policy after the investment.