Introduction
A merger or an acquisition transaction (M&A) can be carried out in a variety of ways, including, inter alia, through merger (ordinary or reverse), a share purchase agreement (SPA), restructuring under the court’s supervision (pursuant to section 351 of the Companies Law) or by a (full/partial) tender offer.
The methods specified above are the most common and recognized ones through which a purchasing company carries out a merger or acquires shares in a target company (which is being bought), the common denominator being implementation of the transaction through the target company’s shares.
Notwithstanding the foregoing, there is a less familiar way to merge/join two companies, which is by purchasing the assets or activity of the target company (in whole or in part), in such a way that the corporate ownership of the target company’s shares remains unchanged, and the subject of the transaction is, as aforesaid, the company’s assets or activity.
In this article, we will briefly review the manner in which a transaction is carried out for the acquisition of assets or activity, the advantages and disadvantages of this transaction compared to transactions made in the company’s shares, and the circumstances in which it is expedient to choose a transaction of this kind.
APA – Overview
When two companies decide to engage with each other through a transaction for the acquisition of activity or assets, the legal document signed between them is called an Asset Purchase Agreement, or APA.
As stated above, a transaction for the acquisition of a company’s activity or assets is a less-known transaction than a share purchase transaction, but it is a transaction which simplifies the corporate aspect involved in M & A transactions, since prima facie it is a commercial transaction between the target company (the company whose activity is being acquired) and the acquiring party. The simpler nature of a transaction of this type stems from the fact that no corporate interaction exists between the companies and/or with the target company’s shareholders.
In practice, in a transaction of this type, the shares of the target company remain in the hands of their original owners, and the acquiring party buys only the activity and/or assets of the target company. The goods sold in this type of transaction may include, inter alia, the equipment and inventory of the target company, the agreements which it is a party to, the target company’s list of customers and/or suppliers, its intellectual property, etc.
While we have noted above that an asset/activity transaction is simpler than a share purchase or merger transaction, as indeed it is, this does not mean that a transaction of this sort has no hurdles or challenges to contend with.
To explicate the matter further, one of the most important actions to be taken in the framework of a transaction for acquisition of the assets or activity of a company, is to “stock-take” all of the Company’s assets (be they real estate, chattels, IP or contractual agreements), evaluate their nature and quality, and price them accordingly. For example, where the target company has won significant tenders which constitute a substantial component of the assets being sold, this may create a significant problem when selling the Company’s assets, since in most cases the terms of the tender include stipulations and restrictions regarding the transfer of rights to third parties and doing so may result in a cancellation of the tender (as shall be detailed below).
APA – Advantages and Disadvantages
As with any transaction, a transaction for the purchase of the assets or activity of a company, has advantages and disadvantages which are relevant to both the purchasing party and to the target company. These advantages and disadvantages are briefly described below.
Advantages:
The most significant advantage lies in the fact that the purchasing party does not automatically assume all the debts and obligations of the target company, for which that company remains exclusively liable. Without derogating from the foregoing, when negotiating such a transaction, the parties may decide between them that certain debts or obligations are to be transferred to the purchasing party, although this must be expressly agreed upon.
Another advantage of an asset purchase transaction, is the fact that the due diligence required before signing the APA is relatively short and simple. Thus, while in a transaction for the purchase of shares, the due diligence examination must encompass all the debts and liabilities of the company, whether to its employees, shareholders, public authorities or third parties, when dealing with a transaction for the purchase of assets or activity of a company, it need only focus on the activity and/or the assets being sold, without dealing with corporate evaluations of the target company, including its share capital, liabilities, debts etc., which very much simplifies the nature and scope of the examination.
In addition to the foregoing, during the negotiations between the parties, the purchasing party may choose to purchase specific assets (the optimum ones from its perspective) and leave the target company with the more problematic assets or the assets which it has no need for. In professional jargon this selecting of assets is called “cherry picking” and it constitutes a very large commercial advantage for the purchasing party.
Finally, we should briefly mention an additional benefit, namely the fact that as part of a transaction for the acquisition of a company’s activity or assets, the purchasing party may deduct part of the acquisition costs by reporting them as a recognized expense or as depreciation.
Disadvantages:
The practical significance of a transaction to purchase the assets or activity of a company is that the private company number of the target company is not acquired by the purchasing party. Hence occasionally, the target company may be a party to agreements, such as distribution or franchising agreements, which the acquiring party wishes to purchase but which cannot be transferred within the framework of a transaction to purchase activity or assets. We should mention in passing, that a similar problem can also be created in a share purchase transaction, since some agreements stipulate that a change in the control shares of the target company constitutes a breach of that agreement or gives the other party to the agreement the right to terminate it.
Another possible disadvantage is the fact that sometimes the transaction may trigger early redemption clauses in the target company’s financing agreements. However, a similar problem also exists in share purchase transactions.
The last drawback we will mention in this article relates to transactions involving regulation (such as tenders won by the target company or existing licenses in its name), which are sold to the purchasing party. In a best case scenario, the conditions for endorsing such tenders or licenses to the purchasing party can be very stringent and problematic, and at worst, they cannot be transferred to the purchasing party at all, and therefore a transaction for the purchase of the activity and/or the assets shall not enable the purchasing party to benefit from these tenders and/or licenses.
Summary
Although a transaction for the acquisition of an activity and/or assets is not as recognized as a transaction for the purchase of shares or a merger, there are often many advantages in having the option to “hand pick” the type of assets or activities being sold within the framework of the transaction, assuming of course that they can be sold and/or endorsed to the purchasing party and are not tied exclusively to the target company.