Mergers and acquisitions (M&A)
Mergers and acquisitions (M&A) involves the following types of transaction:
- Acquisition: the purchase of a controlling interest in any company, private or public.
- Takeover: the acquisition of a publicly quoted company, rather than a private company.
- Merger: a combination of two companies, neither of them acquiring the other.
- Disposal/divestiture: the sale of a controlling interest in any company.
- is the Spin-off/demerger: the disposal of a subsidiary of a public company by way of flotation of the subsidiary on a stock exchange, as a separate quoted entity.
- Scheme of Arrangement: a process whereby a company may be reorganized, including in such a way that an acquisition merger, takeover or disposal is achieved.
Motivations for Acquisition
Only have an acquisition if the acquisition “creates or enhances shareholder value”
The merged entity worth more than the value of the two stand-alone companies.
- Value creation, as a result of synergies:
either revenue synergies (economies of scope) or
cost synergies (economies of scale)
Public Mergers & Acquisitions
Two main types of divestiture :Trade Sales and Spin-Offs
- A trade sale involves the sale of a business to a commercial (trade) buyer, as distinct from a financial buyer such as a private equity firm.
- A spin-off involves the flotation, as a separate entity, of all or part of a subsidiary of the parent, restructuring the subsidiary to be suitable for listing.
Four main options when financing acquisitions. The bidder can offer:
- cash in exchange for target shares;
- new shares in a share swap;
- loan notes or
- Or a combination of any of these.
Private Equity Transactions
The private equity is direct equity investment in private companies, usually intended to finance a change in the company invested in, intending to maximise potential gains.
- A buy-out is a private equity investment in the acquisition of a company as opposed to investing development capital in a company.
- A management buy-out (MBO)– the company is purchased from its owners which may still manage it.
- A management buy-in (MBI)-an external management acquires the company and manages it.
- A buy-in, management buy-out (BIMBO) –combination of buy-out and buy-in.
- An institutional buy-out (IBO) –led by private equity funds (institutions) wishing to acquire the target.
Initial Public Offerings (IPOs)- Rationale
- Companies may float to raise cash for expansion;
- to give them access to capital in the future,
- to realise an exit for existing investors,
- to gain status and credibility,
- to create currency for further shares,
- to create acquisitions.
- Introduction– no shares are issued or sold; when existing shares are traded on the market.
- Retail offering– offer of shares to retail shareholders.
- Institutional offering– offer of shares to institutional investors such as investment firms and funds.
Documentation for Equity Issues
- A prospectus is a document prepared to provide potential investors with full information about a company proposing to issue new securities, or to list on an equity market.
- full information on the offering price,
- full information on the business of the company,
- audited financial statements.
Contents of the Prospectus
- Within the European Union the contents of a prospectus are prescribed by the EU Prospectus Directive.
Its three elements are:
- Summary – must convey concisely, the key information relevant to the securities which are the subject of the prospectus, and help investors to consider to invest in the securities.
- Registration document – containing information about the business, management history and financial information.
- Securities note – containing information about the securities to be issued, price and subscription procedure.
Necessary Documentation in a Corporate Transaction
Corporate Finance Documentation
- Confidentiality Letter: outlines the fact that the vendor is providing non-public information to potential investors or purchasers, who undertake the obligation to keep it confidential.
- Engagement Letter: the letter used to engage an adviser for a particular assignment, establishing the adviser’s duties and the company’s responsibilities.
- Representations, Warranties and Indemnities: During the sales process the vendor represents (confirms) that certain information is true and/or complete, and further provides a warranty (a promise or assurance) that this is so, relating to a number of subjects, such as property, tax, accounting and other information, and additionally, provides indemnities for certain specific matters where there is uncertainly, such as the current year’s tax liability, or ongoing litigation.
Information Memorandum (IM)
- The information memorandum (IM) is a description of the business that is for sale, prepared by the vendor, aiming to provide sufficient information to potential investors.
The IM normally includes:
- description of the business and potential risks, ownership, management,
- material legal issues,
- previous two to three years’ financial statements,
- other relevant information.
Sale and Purchase Agreement
- The Sale and Purchase Agreement is a legal contract creating an obligation for the seller to sell and the buyer to buy the business for the price specified and on the terms and conditions outlined in the Agreement.
Agreement will typically include amongst others:
- A description of entities and assets to be sold, and the amount.
- The completion date and terms of completion.
- Representations, warranties and indemnities.
Due Diligence requirements on a private company acquisition
The 21 Golden Rule
Freshly issued Company Incorporation Certificates
- The Company’s Memorandum and Articles of Association
- Incorporation Certificate.
- Updated Certificate of Good standing issued by the Registrar of Companies.
- Updated Certificate of Incumbency issued by the Company Secretary/ Director, with specific mention to any pending legal actions involving the company.
- Certificates of: a. Shareholders b. Directors and Secretary c. Registered office of the Company.
- Company Resolutions of any share capital increase or reduction.
- Any share Purchase Agreements and proof of filed changes with the Registrar of Companies.
- Register of Members showing all past and current shareholders and share capital history.
- Register of Directors showing history of all past and current directors.
- Copies of all necessary Resolutions, Resignations or Appointment letters of company officers
- Details of any options, warrants or conversion rights for the purchase or subscription rights of any shares .
- Documentation proving direct Beneficial Ownership of shares by individuals, and in the event of use of nominees, the necessary Certified Trust Documentation.
- Evidence of any pledges, or other encumbrance over any of the shares in the Company.
- Evidence of any charges or other encumbrance over any of the assets of the Company.
- Evidence that share capital of the Company is fully paid, and detailed description and valuation of the assets used for this purpose.
- Minutes of Shareholders and Directors meetings from the date of the Company incorporation.
- Any Powers of Attorney or other expressed or implied authority given by the Company to any third person which is still valid together with any relevant company resolutions.
- Copies of all licenses, consents, permits, and registrations held now or were held by the Company.
- Details and copies of all filings made by the Company with the Registrar of Companies, Income Tax Office, VAT Office and any other government organisation.
- Proof of settlement of all taxes, and information as to any pending tax liabilities.
- Provision of company annual audited accounts and auditors reports.
New era of European Union anti Money Laundering Regulations in Banking Practice
EU 4th Money Laundering Directive
In 2014 the Eur. Commission released its proposal for the 4th MLD giving countries years to roll up the changes. It is important for banks and corporates to be prepared to meet the following major changes:
Politically Exposed Persons (PEP)
Customer Due Diligence
Inclusion of Tax Crimes
Due Diligence Outsourcing
Information Requirements for Fund Transfers
The recent terrorist attacks on Europe’s people and values were coordinated across borders, showing that we must work together to resist these threats.
European Commission President Jean -Claude Junker
2 February 2016 in Strasbourg, the Commission presented the “Action Plan” to strengthen fight against terrorist financing.
Main goal to prevent the EU financial system from being used for money laundering and terrorist financing purposes.
Two main objectives:
- PREVENT THE MOVEMENT OF FUNDS AND INDENTIFY TERRORIST FUNDING concentrating in the following areas:
- Ensuring a high level of safeguards for financial flows from high risk third countries.
- Enhancing the powers of EU Financial Intelligence Units and facilitating their cooperation.
- Centralised national bank and payment registers/ central data retrieval systems in all Member States.
- Tackling terrorist financing risks linked to virtual currencies.
- Tackling risks linked to anonymous pre-paid instruments (e.g. pre-paid cards).
- Improving the efficiency of the EU’s transposition of UN asset freezing measures.
- Criminalising money laundering.
- Limiting risks linked to cash payments.
- Assessing additional measures to track terrorism financing.
- DISRUPT SOURCES OF REVENUE FOR TERRORIST ORGANISATIONS
Illicit trade from occupied areas is currently a primary source of revenue for terrorist organisations.
The Commission and the European External Action Service will provide technical assistance to Middle East and North African countries to fight against the trafficking of goods and provide support to third countries to comply with United Nations Security Council Resolutions in this field.
Compliance with EBA regulatory products- EBA Guidelines and Recommendations
The European Banking Authority (EBA) issues regulatory guidelines and recommendations in its fields.
Regulation (EU) No 1093/2010 establishing the EBA requires that competent authorities and financial institutions make every effort to comply with the EBA guidelines and recommendations (Article 16).
Guidelines and recommendations after officially announced, competent authorities across the EU must inform the EBA whether they comply or intend to comply and financial institutions might also have to report whether or not they comply.
Non EU supervising bodies
US Financial Crime Enforcement Network