Shares-for-shares M&A transaction: Sellers to take note

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An M&A transaction in which the consideration for the shares in the target company is settled by shares in the acquiring company (purchaser) requires more planning than a cash transaction.

A seller should consider the following to assess whether receiving shares in the purchaser in exchange for the sale of the target company is feasible:

1. Due diligence on the purchaser

When a seller acquires shares in the purchaser in consideration for the sale of the target company, it is prudent to conduct due diligence on the purchaser.

The due diligence on the purchaser in this context may range from limited due diligence to detailed due diligence with focus on specific areas.

The seller needs to satisfy itself that the shares in the purchaser are worth the sale price of the target company. The seller should also consider the time and cost of conducting due diligence on the purchaser.

2. More extensive representations and warranties from purchaser

The representations and warranties provided by a purchaser in an M&A transaction where the consideration is paid by cash are typically limited to fundamental representations and warranties such as legal existence, due incorporation and good standing.

However, when a seller acquires shares in the purchaser in consideration for the sale of the target company, the seller would want more extensive representations and warranties from the purchaser. This may lengthen the negotiation process.

3. Challenges of claim against purchaser

In view that the seller will hold shares in the purchaser, it may not be feasible for the seller to seek indemnity from the purchaser or bring an action against the purchaser if there is a breach of the purchaser’s representations or warranties or default by the purchaser.

This post first appeared on LinkedIn on 31 August 2023.

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