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LAW KUAN YEW & CO.

ACQUISITION OF COMPANIES 101 – FUNDAMENTAL POINTS TO TAKE NOTE OF

As defined simply, an acquisition of company involves the purchase of all or most part of another company's shares in order to gain control of that company (“target company”).

The 5 key points to take note of in an acquisition are:

  1. Due diligence
    1. The purchaser will usually carry out due diligence inquiry on the target company (and its subsidiaries, if any). The types of legal due diligence are typically, legal and financial (which includes accounts and tax) due diligence. Depending on the nature of business of the target company, sometimes a technical due diligence may be required as well.
    2. The due diligence inquiry may be carried out and completed within an agreed period of time, either before signing of the sale and purchase agreement (“SPA”) or after signing of the SPA but before completion of the acquisition. In the latter case, the SPA will be a conditional SPA.

  2. Searches
    1. As part of the due diligence process, relevant independent searches will also be carried out by the purchaser on the target company (and its subsidiaries, if any), its shareholders (and sometimes directors if required by the purchaser). The primary searches include:
      1. company search, obtained through the Companies Commission, Malaysia or provider of independent credit rating or credit rating agencies;
      2. litigation search, obtained through relevant search platform or court file search, the provider of independent credit rating or credit rating agencies;
      3. winding-up or bankruptcy search, obtained through the Insolvency Department of Malaysia;
      4. in respect of land and property owned/held by the target company (and its subsidiaries, if any), land search obtained through the relevant land offices in Malaysia; and
      5. if the target company is a regulated entity, search on the status of the target company obtained through the search platform provided by the relevant authority or regulator.

  3. Conditions of sale
    1. It is imperative for the vendor to ensure, and purchaser to require, that there are no conditions bound by the target company or the vendor that will restrict the sale and purchase of shares in the target company.
    2. The documents that may contain restriction in change of ownership, shareholders or management of the target company are usually the (i) permits and licences held by the target company, (ii) facility and security documents, or (iii) major contracts executed by the target company.
      If any such restriction exists, the target company or vendor may need to obtain consent from, or to provide notification to, the relevant authority, lenders or its contracting parties (as the case may be) to enable closing or completion of the acquisition and this will need to be provided as conditions precedent in the SPA.

  4. Purchase price & adjustment of purchase price
    1. The purchase price will be determined based on the agreed valuation of the shares in the target company.
    2. Negotiation on the terms of the acquisition may also include provision for any adjustments to the purchase price and how these adjustments will be calculated at the closing or completion of the acquisition.

  5. Representations and warranties

    6. The representations and warranties required of the vendor in respect of the sale shares and the target company include (but not limited to), representations and warranties on the following scope:

    1. legal and beneficial ownership of the sale shares in the target company;
    2. compliance with laws, rules and regulations including anti-money laundering and anti-corruption laws;
    3. compliance with conditions of licences, certifications and permits held by the target company;
    4. accounting and tax compliance, updated tax filing and no undisclosed liability;
    5. status of the contracts and agreements entered by the target company, including facility documents with financiers, and whether there is any default of the terms of any such documents;
    6. no undisclosed liability or breach of statutory obligation in respect of employment matters;
    7. status of properties owned by the target company and whether encumbered;
    8. no undisclosed litigation, legal proceedings or claims, whether pending or threatened, against the target company; and
    9. (9)intellectual property warranties.

    Generally, it may take about 3 to 6 months (or more, for major or complex acquisition) to complete an acquisition, depending on the length of time of negotiation, conditions precedent period and completion of due diligence review. One of the common causes of delay to the closing or completion of an acquisition is prolonged negotiation relating to issues arising from due diligence inquiry.