Serial article regarding M&A on NNA (vol.92)

Asset transfer, business transfer, stock transfer [ Part 2 ]

Last time, we explained about three ways to sell companies, which is asset transfer, business transfer, and stock transfer. In summary about differences between the three, a seller is a target company itself in the case of asset transfer and business transfer, whereas a seller is shareholders in the case of stock transfer. In the two formers, it is needed to identify what to transfer as assets or business, whereas in the latter, assets and business of target company don’t change because stock transfer means the transfer of ownership. We will depict it with the figure below.

Firstly, a seller needs to select which option to choose and then, suggest it to a buyer but it doesn’t mean that only a seller has discretion for schemes and a seller needs to make it with the collaboration with a buyer.  

For example, it’s often occurred that a scheme is changed because of a problem that a seller had not focused on till starting a discussion with a buyer. Another example is that a range of clients, staffs, accounts receivable, and liabilities to be taken over is identified in the case of business transfer.

In the case of stock transfer, there is a big difference between 100% transfer and partial transfer, so what percentages to be transferred should be discussed in negotiation. For example, you need to think carefully if you transfer 100 % or less than 75% to keep the right to refuse in special resolution of shareholders meeting (in Japan 34% is required to reject a special resolution, in Malaysia it is 26%) Another major consideration is choosing whether the company should be consolidated with the Japanese parent company or become a company accounted for using the equity method (between 20% and 50%).

Moreover, in the case of partial stock transfer, a seller and a buyer need to keep their relationship as shareholders after the transfer, and they define the right reserved by a seller clearly in the shareholders agreement.

You also decide whether you need a call option and a put option. A call option is accepting the right for a buyer to buy stock after a certain period have passed, while a put option is giving a seller the right to sell stock. In general, a seller supports management of a company in an advisory capacity for a certain period of time after transferring in the case of 100% transfer so that a buyer can take over it smoothly, but the terms and conditions for this should be agreed at the same time as stock transfer.

As you can see, negotiation process for M&A is to understand the advantages and disadvantages of asset transfer, business transfer, and stock transfer and to decide what to choose from various options.

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