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19 February 2020
This article examines some of the key considerations for buyers and sellers when entering into an M&A transaction and how best to navigate deal-related risks.
Tax considerations are among the most important factors affecting an M&A transaction and its parties. Tax implications arising out of share purchase deals are different from a merger scenario or asset transfer, and each may be more advantageous than the other depending on the transaction circumstances. Therefore, parties should discuss possible acquisition scenarios in detail to find to most beneficial tax structure.
Transaction financing always plays an important role in M&A deals. Buyers should always plan the financing of an acquisition and the post-acquisition process before the signing by considering the target's debt-to-equity ratio.
Parties should execute a letter of intent or memorandum of understanding to set out the framework of the negotiations and understanding of the parties and purchase price mechanics before engaging costly due diligence processes. Even if many of the provisions of similar documents are generally non-binding, parties should try to have binding confidentiality provisions (or separate non-disclosure agreements) and exclusivity provisions in such agreements to ensure that the parties' confidential information is not disclosed and to prevent counterparties from engaging in negotiations with third parties.
In Turkey, M&A deals are generally not subject to regulatory approval. However, depending on the turnovers of the buyer, seller and target, a proposed transaction may be subject to Competition Board approval. Further, M&A deals in some regulated sectors (eg, energy, education, telecoms, banking, financial services and insurance) must be approved by the governmental authorities. Therefore, parties should carefully asses the requirements for such clearances and approvals before starting a new deal.
In many cross-border acquisitions, the buyer may not be fully familiar with the local market and the target's corporate culture. Therefore, parties should plan the post-acquisition and harmonisation process and build a management team that is familiar with the local market and the target's corporate culture. A detailed and carefully structured post-acquisition plan for transitioning to the new corporate culture is highly recommended.
Representations and warranties
It is also crucial to address all of the risks in share purchase agreements by having the right set of representations and warranties in such agreements. Under Turkish law, share transfers do not automatically provide warranties in relation to targets and the parties should insert a separate representation and warranties section in the acquisition documents. Therefore, representations and warranties are at the centre of M&A deal negotiations.
Buyers are recommended to have indemnity clauses in relation to the title and ownership of sale shares, financial statements and taxes, if possible. Such indemnity clauses should be drafted broadly to capture any possible breaches. Representations and warranties regarding disputes and litigation, employment, taxes, legal compliance (including environmental and data protection legislation) and any undisclosed liabilities are also important.
The sell side should always try to insert knowledge and materiality qualifiers in acquisition documents and use wording such as "to the best knowledge of the seller" and "ordinary course of business". Materiality thresholds should be inserted in representations and warranties to decrease their exposure in a possible dispute. Buyers should always try to remove such limitations from representations and warranties.
Sale and purchase agreements should include non-competition and non-solicitation provisions if a deal is 100% sale and the parties do not execute separate shareholders' agreements.
In many deals, the buyer usually pays a fixed purchase price on the date of closing; however, this is quite risky from a buy-side perspective, because if (for example) a company to be acquired incurs losses after the signing of a sale and purchase agreement and before the closing, or the buyer's valuation is higher than the company's value, the buyer will bear such losses. Since buyers are merely estimating the value of a company and entering into the transaction by relying on sellers' representations and warranties, it is highly recommended to include a purchase price adjustment clause in order to mitigate such risks. Claim mechanism, conduct of claims and seller's liability should also be clearly regulated under the acquisition documents.
Depending on the target, an acquisition may be governed by the applicable laws, regulatory approvals, export laws, industry-specific regulations and accounting standards of an overseas jurisdiction and should therefore be carefully examined. Buyers should ensure that they have full understanding of the local laws and accounting standards before proceeding with such acquisitions.
Further, small and medium-sized companies and their management may be unfamiliar with the global standards of M&A documentation. A drafting party, which controls the drafting of the agreement, is therefore crucial for both the sell and buy sides. The drafter can set the framework of discussions and discussion points.
Parties should structure an acquisition in full view of its tax implications and find the most efficient structure from a tax perspective to avoid double or over taxation. Having considered each tax scenario, the parties may decide on the structure of the transaction (eg, an asset transfer or a transfer of shares, merger or spin-off).
To avoid the abovementioned pitfalls in M&A deals, parties should ensure that they have the right tax, legal, financial and commercial advisers.
For further information on this topic please contact Kaan Demir at Kayum & Demir by telephone (+90 212 291 1002 ) or email (firstname.lastname@example.org). The Kayum & Demir website can be accessed at www.kayumdemir.av.tr.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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