M&A for Growing Businesses

The legal framework

A merger or acquisition changes who owns or runs a business. The legal structure decides what is transferred, who carries historic liabilities and which formalities apply. The two basic forms are the share deal and the asset deal.

Share deal and asset deal

In a share deal, the buyer acquires the shares of the company. The company continues unchanged, with all its contracts, permits, employees and liabilities, including those that are not yet known. Because contracts remain with the company, few third-party consents are needed, except where a contract has a change-of-control clause. Sellers usually prefer this form, because the sale of shares is simple and the buyer takes the history of the company.

In an asset deal, the buyer selects the assets and liabilities it takes over. Each contract is transferred separately, which generally needs the counterparty's consent. The employees of a transferred business unit move to the buyer under the collective labour agreement on the transfer of undertakings, which preserves their terms. The buyer can leave unwanted liabilities behind, but the formalities are heavier. Tax treatment differs between the two forms and should be modelled early with a tax adviser.

A legal merger or demerger under the Companies and Associations Code is a third route in which assets and liabilities pass by operation of law.

Price

The headline price is rarely the whole story. A locked-box fixes the price on a balance sheet date and protects against leakage afterwards. A completion accounts mechanism adjusts the price for the position at closing, such as net debt and working capital. An earn-out makes part of the price depend on future performance, and an escrow holds back part of the price to cover warranty claims. Each of these needs careful drafting because each is a frequent source of dispute.

Warranties and indemnities

Warranties are statements about the business. If untrue, they give the buyer a claim, subject to limits in the agreement: a cap, a threshold, a time limit and the exclusion of what was disclosed. An indemnity covers a specific known risk, regardless of fault. Intellectual property and data warranties are a core part of the negotiation and rely on the findings of IP due diligence.

Change of control and consultation

A deal can trigger clauses in the target's key contracts, leases, licences and financing. Employees and, in a company with a works council, the council may have to be informed or consulted. Competition authorities may need to approve larger deals. Mapping these early prevents them from derailing the timetable.

Signing and closing

Signing and closing may be on different dates. Between them, conditions precedent such as approvals and consents are satisfied, and the parties are bound by conduct-of-business covenants. After closing, a transitional services agreement often bridges the handover.

In practice

A Limburg manufacturer with two founders wants to sell 100% of its shares to a competitor. The founders prefer a share deal, and the buyer agrees on condition of a full warranty package. The price is set with completion accounts and an escrow of part of the price for twelve months. Two of the founders will stay for two years under an earn-out.

In the diligence phase, the buyer's lawyers find that the company's largest supplier contract can be terminated on a change of control. The parties agree that the supplier's written consent is a condition precedent. They also find that the main trademark is not in the company's name. The founder assigns it before signing.

For a smaller deal in the same sector, the buyer buys only the business unit and its inventory in an asset deal. It takes over the employees of the unit and signs new contracts with the key customers.

Our data room is used to run the process, contract review is used for the key contracts, and our portfolio platform lists registered IP.

Frequently asked questions

Which is better, a share deal or an asset deal?

Neither is better in general. A share deal is simpler and often preferred by sellers. An asset deal lets the buyer leave liabilities behind but involves more transfers and consents.

What is a locked-box?

A price mechanism that fixes the price on the basis of a balance sheet date in the past, with protection against value leaking out to the seller until closing.

What is the difference between a warranty and an indemnity?

A warranty is a statement about the business that gives a claim if it is untrue. An indemnity covers a specific identified risk, whether or not anyone is at fault.

When must employees be informed?

Where the deal affects them, for example under the rules on transfer of undertakings or in a works council. The timing depends on the structure.

How this connects

M&A and due diligence covers the whole deal, from structure to closing. The review phase is described in M&A Due Diligence: What to Expect, and screening of counterparties in Sanctions Screening and AML.