Mergers & Acquisitions Deal Structuring

Introduction

Structuring a deal in the field of Mergers & Acquisitions (M&A) is a complex process which ranges between several diverse layouts that differ from each other in various aspects: aspects of corporate governance, aspects of regulation, aspects of tax, etc.

Since the Companies’ Law came into force two decades ago, the Israeli Law allows us to take several separate tracks when we are about to carry out a Merger & Acquisition deal.  Moreover, as will be further detailed below, the Israeli courts determined more than once that they are alternative tracks for the implementation of deals and that under each deal, the parties can design the deal as they deem appropriate, provided that they safeguard the rights of all the parties that are involved in the deal as determined by the provisions of the Law.

Mergers & Acquisitions – Preliminary Considerations

When two business firms consider how to carry out an M&A deal, there are major preliminary considerations in light of which the parties address the structuring of the preferred deal out of the three main types of M&A deals: (1) Share purchase deal; (2) an asset acquisition or (3) a Merger.

We will briefly state a number of major considerations while choosing the layout of the deal:  The nature of the activities and the assets of the target company (the acquired company) affect the structure of the deal; the composition of the shareholders in the target company and their standpoint about the suggested deal is a crucial consideration; if the acquired company has a significant reputation; the question of the ability to alter the significant engagements of the acquired company (such as tenders, etc.) will certainly be a significant consideration while choosing the layout of the deal; and, finally, the complexity of the corporate structure of the acquired company is also a consideration when the elected layout is chosen.

A Complete Tender Offer vis-à-vis a Reverse Triangular Merger

The Companies’ Law details two separate tender offers mechanisms for the shares of traded companies: A complete tender offer and a special tender offer (we will not discuss the latter in this article). A complete tender offer is designated to arrange a situation in which the purchase of all the shares of a public company is carried out, through which it becomes a private company. The mechanism that is detailed in paragraphs 336-340 to the Companies’ Law prescribes an equal and transparent process under which the offeror is obligated to provide a tender offer to all of the holders of the minority shares in the target company and to convince them to join the deal.  If there remains a minority that holds less than 5% of the company’s shares, the implementation of the deal (Section 337 to the Companies’ Law) can be enforced thereon.

It is easy to understand that achieving a significant 95% majority of shareholders who agree to the M&A deal is not trivial and that the requirement of such a significant majority is a major obstacle while completing the deal in the track of the complete tender offer.  The high obstacle that is required to form a critical majority of shareholders often leads to the M&A deal structuring in an alternate track of a reverse triangular merger. Under the aforementioned deal, the acquiring company establishes a wholly owned subsidiary which merges the acquired target company thereto.  Thus, the authorizations that are required from the shareholders of the target company are a simple majority of shareholders (with the exclusions that are detailed there).

A similar issue was discussed in the case of Naftali Shani Vs Malam Systems (Originating Motion 786/07) which was discussed in the District Court before the Honorable Judge Dr. Michal Agmon-Gonen. It was explicitly determined in the aforementioned ruling that the legislator’s intention was to arrange two alternative business methods for carrying out an M&A deal and that the fact that the parties chose one of the two tracks, even if at the end of it the result was identical, made the other track unnecessary. In other words, the track of the complete tender offer is not a unique and exclusive track for acquiring companies. Even if the Companies’ Law did not specifically and accurately detail the structure of the deal in the track of a reverse triangular merger, it certainly did not prohibit the structuring of such a deal and the parties are entitled to form and to design a deal as they deem appropriate (as long as the rights of all the parties are safeguarded).

Statutory Merger Deal or a Deal that complies with Section 350 to the Companies Law

Additional alternative tracks which the parties can take are a statutory merger that complies with Part Eight of the Companies Law, or alternatively structuring the deal under sections 350-351 to the Companies Law (Merger through Compromise or a Settlement Approved by the District Court). It should be noted that the method described under Sections 350-351 to the Companies Law was the only method that has existed under the Companies’ Ordinance before the legislation of the Companies’ Law in 1999 and it remained unchanged due to diverse considerations.

The built-in advantage in the above method relates to the vast and diverse authorities and discretion of the Court while discussing complex mergers which also include diverse groups of interest among the authorizations that are required to complete the deal (diverse and sometimes parallel shareholders, various creditors, etc.).

Thus, Section 350 to the Companies Law grants numerous authorities to the Court to act at its discretion in order to determine the composition of the class meetings that are required to authorize the deal – an exceptional consideration which helps make the various interests of the shareholders and the creditors which are about to authorize the deal more accurate. Furthermore, the Companies Law also grants the Court an extremely extended authority of its consideration while it is about to authorize the request for the merger while it gives it plenty of room for maneuver to determine judicial decisions both with respect to the company’s assets and its securities (for this matter, see Section 351(A) to the Companies Law).

Conclusion

The Companies’ Law supports a wide-scale paradigm of contractual freedom according to which the parties to the deals can design the deals in which they are involved as they deem appropriate, provided that the rights of the other parties that are involved in the deals are safeguarded.

The wide consideration that is introduced by the Companies Law becomes much more stronger when we are about to structure an M&A deal, in which the Law details a series of alternative tracks and grants the parties that are involved in the deal a number of options to structure the deal and complete it.

In view of the above, it is extremely important to prepare in advance before giving an offer for an M&A deal in order to take all the relevant considerations and to choose the optimal track of the deal in their light.

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