Mergers & acquisitions law can be complex, and there are many differences between them. This article will explore the differences, as well as the contrasts between them. It will also touch upon the Anti-takeover statutes, Break fees, and Letters of intent. To help you understand the differences, we’ve outlined the most common types of mergers and acquisitions, as well as the most important legal considerations.
Contrasts between mergers and acquisitions
Although the two terms are often used interchangeably, there are fundamental differences between them. The difference lies in the way that a purchase is communicated, which determines whether it is a merger or an acquisition. A merger establishes the target company as the new owner, while an acquisition merely makes the buyer the new owner. Once the buyer has acquired a company, the target company ceases to exist. The buyer’s stock, however, continues to trade.
Both acquisitions and mergers have their advantages. During a merger, the companies involved merge to reduce operating costs and expand their market reach. Acquisitions are much more common and often involve companies of the same size. However, some critics have argued that acquisitions carry a negative connotation because they don’t create a new company. Instead, the smaller company’s assets and operations become part of the larger company.
Anti-takeover statutes
One of the underlying questions that a merger and acquisitions lawyer should ask is whether anti-takeover statutes actually help to protect firms from being acquired. While anti-takeover statutes have been the subject of much research, there is some disagreement about whether they actually help companies. Many studies show that these laws increase the costs of mergers and acquisitions, delay the closing of deals, and even prevent some mergers from closing at all.
The US Supreme Court has ruled on whether anti-takeover statutes are preempted by federal law. Regardless of the answer, anti-takeover statutes will prevent a merger from closing unless the target company’s board waives them. A hostile takeover is always bound to end with the hostile bidder dropping out and the deal becoming a negotiated one. However, there are a few important caveats when it comes to the application of these statutes.
Break fees
A break fee can be an inducement for a buyer and protection against a competing bidder. These agreements should be governed by jurisdictional issues, including whether the target entity is permissible. Parties should also consider whether such agreements constitute unlawful financial assistance. In the UK, for example, a takeover code prohibits such fees because the government is concerned that they discourage competing bids. However, the takeover code does not regulate private M&A, so reverse break fees may be allowed.
The reason for this is simple: the break fee arrangement is structured so that it has an influencing effect on a merger. The courts have determined that, in some cases, such fees can be structurally coercive. In Delaware, for example, the Supreme Court ruled that a break fee is only prohibited if the target shareholders can’t obtain a better deal from another bidder. This principle has implications for India, where a break fee can only be introduced in an acquisition agreement for shareholders if the administrator has a legal duty to a third party.
Letters of intent
Letters of intent in mergers and acquisition (M&A) law are a form of contract between the buyer and seller that typically includes a range of legal provisions. They may serve as evidence in legal proceedings, help determine whether a transaction is commercially viable, or contain anti-avoidance provisions. The letters of intent can also serve as the basis of a public announcement. Here are some common types of letters of intent.
The buyer of a potential acquisition typically presents a Letter of Intent to the seller, letting them know that they are serious about the deal. Letters of intent can either form a merger or a separation. In the former case, the companies combine their business entities under a single umbrella, and the shareholders from both businesses own the combined entity. The acquisition generally benefits the new company by increasing its market share.
No-shop covenants
In mergers and acquisitions, no-shop covenants in a deal are provisions that a target company must strictly comply with. The provision should be enforceable even if a third party makes an unsolicited offer. However, it should be clear that the target company has the right to reject a no-shop provision if another offer is better than its own. This is the case with Microsoft and LinkedIn.
Despite their ominous names, no-shop covenants in mergers and acquisition transactions are crucial to the success of a deal. They limit the ability of a seller to get a better offer from another buyer and prevent the seller from derailing or inflating the purchase price. In most cases, no-shop covenants are enforced by the buyer, while the seller cannot seek out an alternative offer.
