M&A: Should seller accept shares as consideration?

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In the sale and purchase of a business, the seller may receive payment by way of shares issued by the acquiring corporation (i.e. consideration shares) instead of cash. Before accepting payment in the form of consideration shares, the seller should consider the following:

1. Assess the liquidity of the consideration shares
If the consideration shares are shares in a private company, they may lack liquidity. Depending on the terms among the shareholders of the acquiring corporation, the seller may not be able sell the consideration shares unless the majority shareholder decides to sell.

2. Determine whether there is any moratorium/lock-up period
The buyer may request the seller to agree not to sell the consideration shares for a certain period to prevent immediate sale upon completion of the sale and purchase of the business. If the consideration shares are shares in a public listed company, the seller should also consider whether there is any moratorium imposed under the relevant listing rules. It is important for the seller to understand that, during the moratorium period, the seller is restricted from disposing of the consideration shares, even if the market conditions are favourable.

3. Can the seller negotiate for a put option?
A put option grants the seller the right to put (i.e. sell) the consideration shares to the buyer or its controlling shareholder/ultimate owner at an agreed price or based on an agreed valuation mechanism. This safeguards the seller’s interests in the event the value of the consideration shares drops below an agreed threshold.

Due to the factors mentioned above, I have come across M&A transactions with their payment terms structured as cash deals more often than share deals.

This post first appeared on LinkedIn on 27 July 2023.

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