United States: Private Mergers And Acquisitions In The United States: Overview

Q&A guide to private mergers and acquisitions law in the United States.

The Q&A gives a high level overview of key issues including corporate entities and acquisition methods, preliminary agreements, main documents, warranties and indemnities, acquisition financing, signing and closing, tax, employees, pensions, competition and environmental issues.

To compare answers across multiple jurisdictions, visit the Private Acquisitions Country Q&A tool.

This Q&A is part of the global guide to private mergers and acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateacquisitions-guide.

Corporate entities and acquisition methods

1. What are the main corporate entities commonly involved in private acquisitions?

The main corporate entities commonly involved in private acquisitions are:

• C corporations.
• S corporations.
• Limited liability companies (LLCs).
• Sole proprietorships.
• Partnerships.

In practice, the most common entities used in private acquisitions are corporations and LLCs.

2. Are there any restrictions under corporate law on the transfer of shares in a private company? Are there any restrictions on acquisitions by foreign buyers?

Restrictions on share transfer

Typically there are no restrictions on the transfer of shares under corporate law. However, transfer restrictions may exist in the organisational documents of the target or in agreements to which the target's shareholders are a party, such as shareholders' agreements.

Foreign ownership restrictions

While there are generally no per se restrictions on a transfer of shares to a foreign investor, there are a number of situations in which the US Government can deny or limit such investments by foreign persons on national security grounds. For example, under US law the President can review the national security implications of acquisitions of, or investments in, a US business by foreign persons and can block or unwind these transactions when they threaten US national security. The President has delegated these national security reviews to the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee chaired by the US Treasury Department. CFIUS reviews cover only acquisitions or investments that result in a transfer of control over a US business to a foreign person.

Once CFIUS decides that a transaction is within its jurisdiction, it conducts an analysis of any national security risks posed by the transaction. US law gives companies involved in cross-border acquisitions or investments the opportunity to voluntarily obtain a clearance of the transaction by filing a notice with CFIUS. Although this clearance process is voluntary, CFIUS can initiate its own investigation of a transaction if the parties do not choose to file a voluntary notice. Without CFIUS clearance, the President retains the power to block or unwind a transaction indefinitely. The formal CFIUS process takes between 30 and 90 days, although it can take longer when CFIUS demands that parties negotiate a mitigation agreement to address potential national security concerns. CFIUS has broad authority in this regard, and it can impose a range of mitigation measures.

In addition, and directly related to a potential CFIUS review, certain transactions raise US export control issues that could result in a foreign person being prohibited from acquiring a US company. For example, companies from the People's Republic of China cannot acquire companies registered under the International Traffic in Arms Regulations (ITAR), which regulate the export of US-origin defence technology, articles and services. In addition, US companies that handle classified contracts cannot be sold to foreign persons unless the Defense Department approves measures to protect that information from foreign access.

There have been important developments regarding CFIUS recently in the US Congress, where in November 2017 a bipartisan group of lawmakers in both the House and Senate introduced bills that will result in closer scrutiny of investments by China, and investments generally in the technology sector and in companies that handle personally identifiable information or other sensitive data of US citizens. The bill's sponsors have pointed to what they believe is a Chinese policy to structure transactions to avoid CFIUS and thereby acquire US technology with potential military applications. The Senate bill, called the Foreign Investment Risk Review Modernization Act, was introduced by Senator John Cornyn (R-Texas), Senator Dianne Feinstein, (D-California) and Senator Richard Burr (R-North Carolina). While the law governing CFIUS has not changed since enactment of the Foreign Investment and National Security Act in 2007, there may be further regulation of foreign investment as a result of these recent developments.

3. What are the most common ways to acquire a private company? What are the main advantages and disadvantages of a share purchase (as opposed to an asset purchase)?

The most common means of acquiring a private company in the US is by purchasing its outstanding shares, purchasing substantially all of its assets, or merging under state law.

Whether the parties choose between a share purchase, a merger or an asset purchase typically depends on a number of factors, including corporate structuring, tax and the allocation of liability between the parties.

Some of the principal advantages associated with share purchases include:

• Share purchase transactions are usually less complicated and have lower closing costs compared to asset purchase transactions. In a share purchase, ownership of the business and the underlying assets is transferred automatically to the buyer of a target's shares. In an asset purchase, each asset must be legally transferred, which can be difficult or impracticable. Many businesses have local licences and a transfer can involve a lengthy hearing or other administrative delays, as well as a risk of loss of licence.
• Business continuity is generally easier to achieve in a share purchase, as business contracts, intellectual property rights and employment agreements are generally unaffected. An asset purchase typically requires more third party consents (because of anti-assignment provisions), which may be costly or unobtainable, and require the buyer to separately hire those employees it wishes to take on.
• From the seller's perspective, in a share purchase the buyer takes the target's entire business, including its liabilities. The buyer can, however, seek to be indemnified against certain liabilities.
• From the buyer's perspective, each of the selling shareholders are party to the share purchase agreement, making it easier to enforce indemnification claims against selling shareholders (particularly claims not limited by an escrow account), minimising the risk of claims by dissenting shareholders, and allowing the terms of the share purchase agreement to override any pre-existing agreements among the selling shareholders.
• In an asset purchase, there can potentially be higher tax costs for the seller due to the realised gain and the seller can be subject to double taxation (that is, corporate level tax for the seller, as well as shareholder tax on distribution). This is usually only the case when the seller is a C corporation.

Some of the principal advantages associated with mergers are:

• Merger transactions have many of the same advantages and disadvantages relative to an asset purchase as a share purchase. The primary differences between a merger and a share purchase transaction are that:
  
  
  • a merger can be effected by a majority (or super-majority, if required) vote of the target's shareholders and is binding on all shareholders, regardless of whether they sign the purchase agreement (subject to appraisal rights for dissenting shareholders). Accordingly, a merger can be logistically simpler to effect particularly if the target has a large shareholder base or cannot deliver signatures from all of its shareholders. (Many states have "short-form" merger statutes, which allow a parent company to effect a merger without a shareholder vote if the parent owns 90% of the target's shares. This allows a buyer to combine a share purchase and a merger in a two-step transaction, acquiring over 90% of the shares in a first step share purchase and squeezing out the remaining shareholders through a second step short-form merger.);
  • a merger allows for more flexibility with mixed stock and cash consideration in a tax deferred transaction; and
  • a merger can be either a forward merger (target disappears) or a reverse merger (target survives). A reverse merger, like a share purchase, is generally less likely to trigger anti-assignment provisions than a forward merger.

Some of the key advantages associated with asset purchase transactions include:

• They allow for the purchase of a division or business segment that is not an organised legal entity.
• A buyer can "cherry pick" by acquiring only specific assets and assuming only certain liabilities, although the effective exclusion of unwanted liabilities depends on the buyer not being subject to successor liability.
• The parties can avoid complex dealings with minority shareholders which typically arise in a share purchase involving multiple shareholders, and unlike a merger there are no dissenters' rights for objecting shareholders. However, the asset sale will likely be subject to a shareholder vote to the extent it constitutes a sale of substantially all of a company's assets.
• The buyer may be able to obtain significant tax savings (via a basis step-up and resulting depreciation expense) from structuring the transaction as an asset purchase, although there may be a significant tax cost to the seller if it is a C corporation.

4. Are sales of companies by auction common? Briefly outline the procedure and regulations that apply.

An auction process is common in private M&A as a way for sellers to attempt to maximise the target's value.

The auction process is typically organised and run by an investment banker. The banker will prepare a short document called a "teaser", which describes the target and the proposed sale transaction. They will also prepare a confidential information memorandum that provides a comprehensive description of the target's business, including certain financial information. The investment banker will identify a pool of potentially interested parties based on input provided by the seller. Typically only those parties interested in proceeding will be required to sign a non-disclosure agreement (NDA) to see a copy of the confidential information memorandum. The seller will then grant access to the potential buyers who signed the NDA to conduct due diligence on the target.

Once the NDAs have been signed, the confidential information memoranda circulated and preliminary due diligence carried out by potential buyers, the investment banker will send potential buyers a letter outlining the bidding process and ask the bidders to put forward their non-binding indications of price and terms, along with other information such as their plans for financing the transaction. The seller will typically select the top group of bidders to proceed to the next phase of the bidding process, where they will be given the opportunity to meet with the target's management and be asked to submit a binding purchase offer together with a mark-up of the form of transaction agreement provided by the seller. In this final bidding round, the seller will often further narrow the pool of potential bidders to focus the negotiations and highlight the major deal points that distinguish the leading bids.

There are two primary advantages to an auction process:

• An auction is designed to allow the seller to maintain control of the process and, by maintaining competition among bidders, allows the seller to maximise the purchase price and obtain favourable sale terms.
• A properly structured auction process is one way for the target's board of directors to establish that they discharged their fiduciary duties to the target's shareholders under applicable (usually Delaware) state law.

There are also risks to running an auction process. For example, it is harder to maintain confidentiality when a large group of potential buyers are involved in the auction. Further, a failed auction may pose greater risk to the seller's business (particularly when it is widely known that the target was for sale) than failed negotiations with a single bidder due to the resulting perception of the target as "damaged goods". Some bidders may refuse to participate in a competitive process and only devote resources to a potential acquisition if it has an exclusivity agreement with the seller. Therefore, a company that is contemplating a sale process must discuss with its investment banker and other advisers whether an auction is the best way to maximise value and minimise risk, and whether the auction should be broad based or limited to a small universe of potential bidders.

Preliminary agreements

5. What preliminary agreements are commonly made between the buyer and the seller before contract?

Letters of intent

A letter of intent (LOI) sets out certain key terms of the transaction that the parties may seek to negotiate at an early stage, before devoting significant resources to negotiating the definitive transaction agreement and completing due diligence. Typically, the terms in the LOI are non-binding, although certain terms can be legally binding on the parties.

Non-binding provisions typically seen in LOIs include:

• Form and structure of the transaction.
• Valuation, purchase price and purchase price adjustments.
• Timing.
• Conditions precedent to closing, to the extent known, including assumptions regarding regulatory requirements.
• Key employees that must be retained.
• A summary of key representations and warranties, indemnification and other risk allocation terms.

Customary binding provisions include:

• Exclusivity (see below, Exclusivity agreements).
• Confidentiality.
• Allocation of costs and expenses prior to signing.
• Co-operation with the diligence process and access to the target.
• Break fees or liquidated damages in the event of breach, to the extent agreed.
• Governing law and dispute resolution.

If only portions of the LOI are legally binding, the parties must state in the LOI that they do not intend to be bound, except with respect to the binding provisions.

Exclusivity agreements

Before signing the definitive transaction agreement, buyers will often ask for exclusivity from the seller, requiring the seller not to "shop" the target to any alternative buyer during the exclusivity period. The exclusivity period generally ranges from two to four weeks, but may be longer. The parties can either build the exclusivity obligations into the LOI or enter into a separate exclusivity agreement that can be coupled with a non-binding term sheet. The parties can agree to automatically extend exclusivity if negotiations are ongoing, or to terminate exclusivity early if the buyer deviates from the terms outlined in the LOI or term sheet.

Non-disclosure agreements

The primary purpose of a non-disclosure agreement (NDA) in an acquisition is to protect the confidential information of the target through restrictions on:

• The potential buyer's use of the information, particularly if the potential buyer is a competitor of the target.
• The potential buyer's disclosure of the information, to minimise the risk of unwanted leakage of confidential information to third parties.

In some cases the buyer can also require the seller to agree to the use and disclosure restrictions, particularly if the buyer is providing confidential information about its business to the seller.

A secondary purpose of NDAs is to regulate certain aspects of the relationship and the negotiations between the parties, including:

• Keeping the existence of negotiations confidential.
• Limiting any claims by recipients of confidential information.
• Preventing solicitation of employees or customers.
• Regulating the manner in which the potential buyer can contact management and customers.

Key terms to be negotiated by the parties include the following:

• The definition of confidential information. This is usually defined broadly to cover all information about the target shared in any form, as well as notes or analyses prepared by the recipient. The definition includes certain exceptions, such as information available to the public on a non-confidential basis, and allocates the burden of proving that information is or is not confidential.
• The universe of affiliates, representatives, agents and other persons with whom the buyer can share confidential information. The seller can require the buyer to be responsible for any breach of the NDA by the recipients, and can require the seller's approval for information to be shared with potential financing sources for the seller to maintain control over the auction process.
• The process the buyer must follow when disclosure is compelled by law. For example, prompt notification to the seller before any information is disclosed, or co-operation in seeking a protective order to attempt to prevent disclosure.
• The obligation of the buyer to return or destroy confidential information if the transaction is terminated, as well as the conditions under which the information can be retained.
• The term of the NDA. This typically runs from one to three years depending on the nature of the confidential information.

Asset sales

6. Are any assets or liabilities automatically transferred in an asset sale that cannot be excluded from the purchase?

Asset purchases in the US are typically structured so that liabilities to be assumed by the buyer, if any, are explicitly identified in the asset purchase agreement and reflected in the purchase price. Nevertheless, under the doctrine of "successor liability", liabilities of the target can be transferred to the buyer by operation of law under various legal theories notwithstanding the provisions negotiated by the parties in the asset purchase agreement. Examples where successor liability is likely to apply include:

• Bulk sales laws liabilities.
• Liabilities attached to a fraudulent conveyance.
• Tax liabilities.
• Environmental liabilities.
• Product liabilities.
• Employment liabilities.

Where liabilities transfer to the buyer by operation of law, the buyer can seek contractual indemnities from the seller in respect of the liabilities.

The buyer may also be exposed to successor liability (and the target's board of directors may be subject to personal liability) in transactions where the proceeds are distributed to the target's shareholders and adequate provision is not made to satisfy those liabilities that are retained by the target in the asset purchase transaction.

7. Do creditors have to be notified or their consent obtained to the transfer in an asset sale?

State law must be consulted for the applicable bulk sales laws or bulk transfer laws. Bulk sales laws are state laws that require, among other things, a buyer to give notice to the target's creditors if it is acquiring substantially all of the target's business or assets. The majority of states have repealed these laws as were previously governed by Article 6 of the Uniform Commercial Code (UCC) as promulgated by the various state legislatures. However, a minority of state legislatures have enacted a revised Article 6 of the UCC in recent years.

Share sales

8. What common conditions precedent are typically included in a share sale agreement?

There are a number of conditions precedent that are typically included in a share sale agreement.

Mutual conditions that apply to both the buyer and seller include:

• "Bring-down" of representations and warranties, which provides that the representations and warranties of the other party are true and correct as of closing (subject to a materiality standard).
• Compliance with covenants.
• Receipt of regulatory clearances, including expiration of anti-trust waiting periods and the Committee on Foreign Investment in the United States.
• Absence of injunctions.
• Execution of ancillary agreements (for example, escrow agreement and transition services agreement).

Additional conditions on the buyer's obligation to close include:

• Receipt of other required approvals (for example, shareholder approval).
• No material adverse effect on the target (MAC clause).
• Receipt of key third party consents.
• Receipt of financing (if not satisfied, this can lead to the buyer paying a reverse termination fee).
• Absence of litigation.
• Other deal-specific conditions (for example, issues identified in due diligence).

Additional conditions on the seller's obligation to close include receipt of shareholder approval, if required.

Seller's title and liability

9. Are there any terms implied by law as to the seller's title to the shares in a share sale? Is any specific wording necessary and do buyers normally impose a higher standard than is implied by law?

In a share sale, no warranties relating to title are implied by law. However, there are a number of fundamental representations and warranties that the buyer usually seeks from the seller with respect to the shares of the target:

• The seller has full title to the shares.
• No encumbrances exist on the shares.
• The seller has the authority to transfer the shares.
• The shares being sold represent 100% of the shares of the target.

When the target is either a partnership or a limited liability company (LLC), the buyer must also ensure that it has a good understanding of how it will become a substitute partner or member of the target and the economic and voting mechanics set out in the applicable partnership agreement or LLC operating agreement entered into among the partners or members.

10. Can a seller and its advisers be liable for pre-contractual misrepresentation, misleading statements or similar matters?

Seller

Sellers can be held liable for pre-contractual misrepresentations and misleading statements in any format. The acquisition agreement must therefore include a clause stating that the only representations and warranties given by the seller in respect of the transaction are those explicitly contained in the agreement. Sellers may want to add a non-reliance clause or buyer's representation that the buyer is not relying on any statements not contained in the acquisition agreement to limit the risk of any claim for misrepresentation or fraud by the buyer.

Advisers

Claims against advisers are rarely successful, as the seller's advisers owe no duty to the buyer, except in cases of fraud or where the seller's advisers know the buyer will rely on their work (such as legal opinions). For this reason, any reports prepared by the seller's advisers that may be shared with the buyer or with any other third party (such as financing sources or co-investors) must include disclaimers of reliance.

Main documents

11. What are the main documents in an acquisition and who generally prepares the first draft?

The main document is the share or asset purchase agreement or merger agreement. The first draft is typically prepared by the buyer, except in an auction setting, where the seller can provide an auction draft to bidders.

Other documents drafted by the buyer include the following:

• In a share purchase, any documents required to formalise the transfer of the shares, such as stock power forms or assignments of limited liability company interests.
• In an asset sale, assignment agreements or bills of sale for the assets.
• In a merger, a certificate of merger to effect the transaction under the applicable merger statute.
• Employment and non-competition agreements.
• Transition services agreements, where applicable.
• Escrow agreement, where applicable, generally based on the escrow agent's form.

The seller prepares the following documents:

• Disclosure schedules qualifying the seller's representations and warranties.
• Third party consents, where necessary for the transfer of the shares or assets.

Acquisition agreements

12. What are the main substantive clauses in an acquisition agreement?

A share or asset purchase agreement or a merger agreement will include:

• Details of the consideration, including:
  
  
  • the type of consideration (stock, cash, or some combination);
  • the timing of payment;
  • any pre- or post-closing adjustments to the purchase price; and
  • the mechanics for how the purchase price is paid.
• Conditions precedent to closing the transaction (for example, regulatory approvals).
• Representations and warranties regarding the shares/assets and the business.
• Covenants of the parties, including interim covenants regarding operation of the business during the period between signing and closing.
• Indemnification and any limits to indemnification.
• Events and effect of termination prior to completion.

An asset purchase agreement will include the same provisions, as well as:

• Identification of which assets are the subject of the acquisition.
• Identification of the liabilities to be assumed by the buyer.

13. Can a share purchase agreement provide for a foreign governing law? If so, are there any provisions of national law that would still automatically apply?

Parties can specify any governing law they wish for the acquisition agreement. However, the laws of the state of incorporation of the target will apply regarding:

• Requirements for transfer of the shares.
• The mechanics and effect of the merger.
• The rights of dissenting shareholders.
• The duties of the target's board of directors.
• Successor liability in an asset sale.

If the target conducts business in the US, US federal anti-trust laws also apply. If the target is publicly traded in the US, or if the buyer is offering securities in the US as part of the purchase price, US federal securities laws will also apply, and state securities or "blue sky" laws may also apply.

Warranties and indemnities

14. Are seller warranties/indemnities typically included in acquisition agreements and what main areas do they cover?

In the US, there is no distinction between representations and warranties. Representations and warranties of both parties are included in the acquisition agreement. Seller warranties are generally comprehensive and typically include the following:

• Title to shares/assets.
• Authority.
• Enforceability and no conflicts.
• Capitalisation.
• Subsidiaries.
• Financial statements.
• Undisclosed liabilities.
• Material contracts.
• Litigation.
• Tax matters.
• Intellectual property.
• Real property and leases.
• Personal property.
• Environmental matters.
• Employee benefits and labour matters.
• Compliance with laws and permits.
• Related party transactions.
• Insurance.

The subject, scope, duration and limitations of specific indemnities are negotiated between the parties, but common areas covered by indemnities in acquisition agreements include the following:

• Breach of representations, warranties and covenants.
• In asset purchases, claims relating to excluded assets and liabilities.
• Taxes arising during the period prior to closing.
• Historical environmental matters.
• Specific issues found in due diligence for which the buyer requires indemnification.

In both stock and asset transactions and mergers, depending on the creditworthiness of the seller (for example, if the seller is a shell company), it may also be appropriate for the seller's parent entity or majority shareholder to provide an indemnity or otherwise guarantee the obligations of the seller.

15. What are the main limitations on warranties?

Limitations on warranties

The survival periods for the representations and warranties are usually explicitly limited in duration by the acquisition agreement. The survival periods can vary between different types of warranties and they set out the period of time within which a party can bring a claim for breach of warranty after the closing. In addition, the parties can agree on limitations to indemnification for breach of representations and warranties, such as prescribed deductible or "tipping basket" amounts on losses that must be exceeded before any losses become subject to indemnification, as well as one or more caps on the total amount of losses that can be recovered under the indemnity for breach of warranties. Agreements can also include clauses excluding consequential, special and/or punitive damages from any calculation of losses under the agreement.

Qualifying warranties by disclosure

Sellers generally provide disclosure schedules to the acquisition agreement which, in addition to listing information required by a particular warranty for informational purposes (for example, to identify excluded assets and liabilities in an asset sale), also serve to qualify applicable warranties. These qualifications or exceptions to the representations and warranties are included in the disclosure schedules to make the relevant warranty true as stated in the acquisition agreement (for example, the seller will disclose existing litigation in order to qualify the "no litigation" warranty). Where signing and closing are not simultaneous and warranties are "brought down" to closing, parties can negotiate whether the seller can update the disclosure schedule, if required to make the warranties accurate as of closing. This may be an issue where, due to required regulatory approvals, the closing is expected to occur months after the signing date. However, a buyer will typically negotiate certain rights in connection with allowing a seller to update the disclosure schedule, including termination and/or indemnification rights.

16. What are the remedies for breach of a warranty? What are the time limits for bringing claims under warranties?

Remedies

The two primary remedies for breach of a representation and warranty are indemnification for losses suffered and termination rights.

The following apply to indemnification:

• It is common in private M&A for parties to indemnify each other for losses arising from breaches of representations and warranties.
• The scope of indemnification is often heavily negotiated and is subject to limitations, including the following:
  
  
  • losses below a certain dollar threshold are not included in calculating indemnifiable losses;
  • aggregate losses up to a certain dollar threshold are also either excluded from indemnifiable losses (a deductible) or included in the losses subject to indemnification only if the threshold is exceeded (a tipping basket); and
  • the total amount of losses recoverable for a breach of warranties is capped at a percentage of the purchase price, with certain warranties being capped at up to 100% of the purchase price.
• In recent years, warranty and indemnity insurance (W&I insurance) has become available for buyers to supplement the indemnification protection under the acquisition agreement. W&I insurance can provide additional recovery for the buyer for a breach of warranty by the seller/target above the limitations negotiated in the acquisition agreement. There are generally a variety of exclusions to recovery under the policy.

The following apply to termination rights:

• The parties can specify in the acquisition agreement that termination rights are available to the extent that any representation and warranty is not true and correct by the applicable materiality standard (that is, all material respects, except those that constitute a material adverse effect, or a hybrid approach whereby the general warranties are subject to the material adverse effect qualification and fundamental warranties are brought down in all material respects or "flat" without any materiality qualification).
• To the extent that the representation and warranty does not survive the closing, the only remedy in the absence of fraud is a termination right.

Time limits for claims under warranties

Acquisition agreements typically provide for a survival period of 12 to 24 months following closing for breach of warranty claims. Buyers will seek to have the warranties survive for at least one full audit cycle after closing to allow the audit process to uncover potential losses that may be subject to indemnification. Buyers will often ask for a longer survival period for certain warranties (for example, environmental, tax and intellectual property) or even indefinite survival in the case of fundamental warranties (for example, title to shares/assets and authority). The statute of limitations for these claims under law varies depending on the type of claim and applicable state law.

Consideration and acquisition financing

17. What forms of consideration are commonly offered in a share sale?

Forms of consideration

Typically the consideration will be in the form of cash, shares, promissory notes, assumption of liabilities, or some combination of them.

Factors in choice of consideration

Common factors to consider include:

• Tax treatment for the seller and the buyer.
• Whether the parties desire that the seller have some continuing interest in the business after closing.
• The buyer's ability to secure financing.
• The buyer's cost of capital.

18. If a buyer listed in your jurisdiction raises cash to fund an acquisition by an issue of shares, how is the issue typically structured? What consents and regulatory approvals are likely to be required?

Structure

If the buyer is a public company, it can issue shares either through an underwritten public offering or in a private placement subject to an exemption from registration requirements under US securities laws.

Consents and approvals

Depending on the organisational documents of the buyer and applicable state laws and stock exchange rules, the buyer will require approval of the board of directors to issue stock, and may require shareholder approval if the share issue exceeds 20% of the buyer's existing float. The offering must also be registered with the US Securities and Exchange Commission (SEC) and the shares approved for listing on the applicable stock exchange, unless the shares are issued in a private placement that is exempt from the registration requirements.

Requirements for a prospectus

Unless an exemption from registration with the SEC is available for the offering of shares (for example, a private placement exemption), the offering must be registered and a registration statement, including a prospectus, must be filed with the SEC and delivered to investors. Further, the SEC staff can conduct a review of the registration statement and provide comments before declaring the registration statement effective. Accordingly, appropriate measures must be taken to account for any possible review period by the SEC staff in connection with these transactions. In addition, to the extent that an acquisition of the target has occurred or is probable, under Rule 3-05 of Regulation S-X the registration statement must include certain audited and pro forma financial statements that may require additional time to prepare.

Certain information may also need to be furnished to investors in a private placement, depending on the exemption being used, the size of the offering and the nature of the investors.

19. Can a company give financial assistance to a potential buyer of shares in that company?

Restrictions

A seller can give financial assistance to a buyer and there are no specific restrictions applicable to a private company sale, provided that the proposed financial assistance is not otherwise deemed to be a fraudulent conveyance of seller stock and/or assets. More specifically, the seller can provide liens, guarantees and restrictive covenants to support the buyer's debt financing for the acquisition, provided that the liens, guarantees and covenants are not effective until the closing.

Exemptions

Not applicable.

Signing and closing

20. What documents are commonly produced and executed at signing and closing meetings in a private company share sale?

Signing

The parties will execute a definitive share purchase agreement at signing. If closing will occur after signing, parties can attach certain ancillary documents (such as escrow agreement, employment agreements, and transition services agreement) as exhibits, either in agreed form or in executed form, to become effective at closing.

Closing

Typical closing documents include:

• Funds flow memorandum.
• Good standing certificates and bring-down certificates.
• Certificates of organisation.
• Officers' certificates, secretaries' certificates, incumbency certificates, tax certificates and receipts.
• Releases.
• Stock powers or assignment of limited liability company or partnership interests.
• Employment agreements for key employees.
• Non-compete agreements.
• Escrow agreement.
• Legal counsel opinions (where necessary).

In addition to the above, in an asset transaction the closing documents can include:

• Bill of sale.
• Assignment agreement.
• Intellectual property assignment.
• Deeds of transfer.

In an acquisition of a business unit or subsidiary, the closing documents can also include:

• Transition services agreement.
• Intellectual property licences.
• Manufacturing, supply or other commercial agreements.

21. Do different types of document have different legal formalities? What are the formalities for the execution of documents by companies incorporated in your jurisdiction?

The laws of the state in which each party is organised will govern the execution formalities. Typically there are no special formalities required, other than ensuring that the parties entering into the acquisition agreement have the authority to enter into the agreement. Authority is usually conferred on the officers of the party by virtue of the organisational documents of the company or by a resolution of the board of directors or similar constituent body.

With respect to asset transfers, the state law in which the target's assets are located must be reviewed because requirements vary from state to state and conveyances of property may entail additional formalities. Some states require documents to be notarised and real estate records at the county level must be searched.

22. What are the formalities for the execution of documents by foreign companies?

There are no additional formalities at either the federal or state level for the execution of documents by foreign companies. The requirements of the foreign company's home jurisdiction will apply.

23. Are digital signatures binding and enforceable as evidence of execution?

Digital signatures are binding and enforceable in the US. Both federal and state law provide that no contract or electronic signature can be considered unenforceable solely because of its electronic form. The federal Electronic Signatures in Global and National Commerce Act (ESIGN) and the Uniform Electronic Transactions Act (UETA) (uniform act adopted in most states) govern digital signatures. A few states use non-Uniform Electronic Transactions Act statutes or common law with respect to digital signatures.

24. What formalities are required to transfer title to shares in a private limited company?

In a share sale, the parties must execute a written instrument of transfer such as a stock certificate or stock power form. The buyer will typically receive a new stock certificate as a record of ownership of the target shares. Limited liability company and partnership interests are often uncertificated and are transferred by means of an assignment of membership interest or partnership interest. It is also important for the buyer to check the organisational documents of the target as well as any shareholders' agreements to ensure any share transfer restrictions are either complied with or waived.

In a merger, title to the shares of the target transfers by operation of law after the merger agreement is approved by the requisite majority of the target's shareholders and the closing is effected by filing a certificate of merger in the target's state of incorporation. While it is desirable that the target's shareholders exchange their share certificates for the merger consideration, it is not necessary for the share certificates to be tendered for payment in order for title to pass to the buyer.

Tax

25. What transfer taxes are payable on a share sale and an asset sale? What are the applicable rates?

Share sale

Typically, there are no transfer taxes imposed on a share sale. However, some states can impose tax based on the nature of the assets held by the target. For example, New York taxes the transfer of shares of a corporation that has New York real estate.

Asset sale

The transfer of assets may be subject to sales and real estate transfer taxes imposed by the states in which the assets are located. Many states have an exemption from sales tax where all of the assets of a business are being sold.

26. What are the main transfer tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?

Share sale

See Question 25, Share sale.

Asset sale

Many states have an exemption from sales tax where all of the assets of a business are being sold.

27. What corporate taxes are payable on a share sale and an asset sale? What are the applicable rates?

Share sale

The gain on the transfer of shares of a corporation is subject to shareholder-level tax. The top marginal corporate tax rate is 21%, and the top marginal individual tax rate is 37%. Non-US shareholders are not taxed on the sale of stock of a corporation unless the corporation is a "United States real property holding corporation". Non-US shareholders are taxed on the sale of interests in limited liability companies and partnerships at the same tax rates as US shareholders.

Asset sale

The seller pays tax on the gain on the transfer of assets.

28. What are the main corporate tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?

Share sale

A share transfer can qualify for tax free treatment if certain technical requirements are met. The requirements vary depending on the form of transaction (for example, share purchase, forward merger or reverse subsidiary merger) and the amount and nature of the stock consideration in the transaction.

Asset sale

A corporation can transfer substantially all of its assets in a tax-free transaction if the consideration it receives is solely voting stock of the buyer or alternatively, non-stock consideration can be used if the non-stock consideration is less than 20% of the consideration and liabilities that are assumed are treated as non-stock consideration for these purposes.

29. Are other taxes potentially payable on a share sale and an asset sale?

In general, there are no other potentially payable taxes but applicable state tax laws must be reviewed.

30. Are companies in the same group able to surrender losses to each other for tax purposes? For example, can interest expenses incurred by a bid vehicle incorporated in your country be set off against profits of the target before tax?

US corporations can tax consolidate if there is common ownership under a US corporation of at least 80% in terms of both voting and value.

Employees

31. Are there obligations to inform or consult employees or their representatives or obtain employee consent to a share sale or asset sale?

Asset sale

Without a contractual right to employment (either through an individually negotiated agreement or collective bargaining agreement), employees in the US are "at will" employees. Therefore, unless the Worker Adjustment and Retraining Notification Act (WARN Act) or a state analogue is triggered, there is no obligation to inform or consult employees or obtain consent to a share sale, merger or asset sale.

The federal WARN Act requires notification to employees and any union representatives if a plant closing or mass layoff will affect 50 or more employees. The notice must be provided 60 days before the layoff and can affect the timing of closing. Similar laws are in place in various states and local jurisdictions.

A buyer's ability in an asset sale to choose which employees to hire and on what terms can be restricted by the employees' union representation. In some cases, where the buyer hires a substantial number of the seller's employees, the buyer may be considered a successor of the seller and subject to the same collective bargaining agreement.

Share sale

The WARN Act applies in a share sale just as it would in an asset sale. Unlike an asset sale, however, employment relationships and collective bargaining agreements remain in effect unless the operative documents contain change of control provisions.

32. What protection do employees have against dismissal in the context of a share or asset sale? Are employees automatically transferred to the buyer in a business sale?

Business sale

Without a contractual right to employment (either through an individually negotiated agreement or collective bargaining agreement) employees in the US are "at will" employees. The extent to which employees are protected in a business sale will therefore depend on any contractual rights either to severance or notice. Buyers must therefore be sure to review any employment agreements, severance plans or collective bargaining agreements to understand the rights of the target's employees.

Share sale

In a share sale or merger, employment relationships and collective bargaining agreements remain in effect unless the operative documents contain change of control provisions.

Transfer on a business sale

If the transaction is a share sale or merger, then employees are automatically transferred (through continued employment with the target) in the absence of any change of control provisions contained in employment agreements or collective bargaining agreements. In an asset sale, the buyer typically chooses which employees it will acquire.

Pensions

33. Do employees commonly participate in private pension schemes established by their employer? If an employee is transferred as part of a business acquisition, is the transferee obliged to honour existing pension rights or provide equivalent rights?

Private pension schemes

Private pension schemes take the form of single-employer defined benefit plans or defined contribution plans, or multi-employer pension plans. Employers are not required to offer these benefits and defined benefit plans have become less common in recent years, as more employers offer defined contribution plans qualified under section 401(k) of the Tax Code.

Pensions on a business transfer

In an asset transaction, the buyer and seller will negotiate the extent to which the buyer will assume the target's benefit plans and related liabilities. Statutory obligations under the Employee Retirement Income Security Act (ERISA) may also arise to the extent the target contributes to a multi-employer plan. In a share sale or a merger, the buyer will assume the target's obligations as a matter of law.

Competition/anti-trust issues

34. Outline the regulatory competition law framework that can apply to private acquisitions.

Triggering events/thresholds

The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act), and the rules and regulations promulgated under it require notification of mergers or acquisitions if all of the following criteria are met, unless the parties qualify for an exemption:

• At least one of the parties is engaged in an activity affecting US commerce.
• As a result of the acquisition or merger, the acquiring party owns any combination of voting securities, non-corporate interests and assets of the target with an aggregate value greater than US$80.8 million (as of February 2017 and adjusted annually).
• In cases where the transaction is valued between US$80.8 million and US$323.0 million (as of February 2017 and adjusted annually), the parties satisfy additional worldwide sales/assets threshold requirements.

Even where the transaction does not require pre-closing notification, the authorities can investigate and challenge an acquisition.

Notification and regulatory authorities

If the triggering thresholds are met, the parties must submit HSR Act filings simultaneously to the Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ), and cannot close the transaction before the applicable waiting period expires or is terminated early. The initial waiting period for most transactions is 30 calendar days, beginning on the day after the FTC and DOJ receive notification and ending at 11:59 pm on the 30th day after that date. The initial waiting period for cash tender offers and certain insolvency transactions is 15 calendar days. The parties can request early termination of the HSR Act waiting period, which, if granted, becomes public.

The FTC or the DOJ can extend the initial waiting period by making a request for the submission of additional information and documentary material (Second Request) from a person filing a notification. (Only one agency will investigate a transaction in depth.) This automatically extends the waiting period until 30 calendar days (or ten days in the case of cash tender offers and insolvency transactions) following substantial compliance with the Second Request. At the end of the extended waiting period, the parties are free to close the transaction unless the investigating agency obtains an injunction in a federal district court preventing the parties from closing. Investigations that proceed to the Second Request stage often take up to six months or more to be resolved.

In addition to the federal anti-trust requirements, public takeovers in industries such as banking, utilities, insurance and communications may be subject to approval by one or more regulatory agencies. Anti-trust inquiries into an acquisition may also result from attorney generals of states affected by the transaction.

Substantive test

The US anti-trust laws are intended to prevent transactions where the effect "may be substantially to lessen competition, or tend to create a monopoly". There are three kinds of transactions that can have an anti-competitive effect:

• Horizontal transactions (transactions between two competitors).
• Vertical transactions (transactions between a buyer and seller).
• Potential-competition transactions (transactions where one of the parties is likely to enter the market and become a competitor of the other).

The analytical framework consists of three elements: product and geographic markets, competitive effect, and entry and efficiencies. In practice, in assessing whether a transaction will substantially lessen competition, the government typically considers whether, for any identifiable group(s) of customers, the transaction is likely to result in any of the following:

• Prices that are higher than they would be without the transaction.
• A decrease in the level of product quality or customer service.
• A decrease in the rate of technological innovation.

Environment

35. Who is liable for clean-up of contaminated land? In what circumstances can a buyer inherit and a seller retain liability in an asset sale and a share sale?

Environmental laws are far-reaching and liability can be imposed on current and previous owners and operators for the costs arising out of the investigation and remediation of contamination. Liability under these environmental laws is strict and joint and several. Therefore, irrespective of whether a party was responsible for the contamination, it can still be held liable for clean-up costs of the property that it once owned or used, even if the contamination was caused by a prior owner or a neighbouring property.

Structuring the transaction as an asset or share purchase or a merger can have an impact on liability allocation. An asset purchase favours the buyer, since a buyer can shield itself from environmental liability by carving it out. While the liability can be contractually allocated, many federal and state courts, under various doctrines of successor liability, have found that a buyer in an asset purchase will assume the target's environmental liabilities whether or not they are associated with the purchased assets. However, the liability is determined on a case-by-case basis and tends to involve fact-intensive analyses.

In a share purchase or merger, the buyer will obtain all of the liabilities and obligations of the target. As such, comprehensive environmental due diligence is vital and must include current properties, former properties and operations as well as businesses acquired and divested. Typically, the buyer will seek indemnification in respect of costs from the investigation and remediation of contamination that was present on the property before the closing.

Originally published in Practical Law

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.