On the different ways to carry out an acquisition

On the different ways to carry out an acquisition

An acquisition generally refers to an arrangement in which a company's share capital or a business as a whole changes owner. There are of course other ways too, and the method is not always fixed right at the outset. Choosing the right structure often depends on the structure of the target, the parties' objectives, taxation and financing. The company form and ownership structures have a central practical significance in the arrangement (including liabilities, decision-making and taxation), so the method of sale and the documentation are tailored accordingly.

This article concerns arrangements under Finnish law, and the tax treatment described applies specifically in Finland.

On the different structures

Below is an illustrative list of typical structures that can be used as part of corporate arrangements, with brief examples of situations they might suit.

Arrangements carried out through a demerger

In some situations, the sale is preceded by a demerger, in which the selling company separates the business to be sold into its own company and leaves the rest of the assets or operations in another. This can clarify the object of sale, limit liabilities and can also make it easier to price the whole being sold.

In practice, this often relates to a situation where the selling company owns a property on which the business operates and the seller does not want to sell it, or the buyer does not want to buy it. In such cases, the buyer often continues to use the property on the basis of a lease drawn up in connection with the sale. There may also be similar reasons relating to intellectual property rights. On the other hand, the reasons may also be tax-related, or simply that the parts of the business are more valuable split up than as a whole that, for some reason, does not work and does not produce the desired synergies.

Arrangements carried out through a merger

Sometimes a merger is a natural route for a corporate arrangement. In a merger, the company being sold merges into the acquiring company, and in return the seller's shareholders usually receive shares in the acquiring company. Cash consideration is also possible to a limited extent.

In practice, a merger can be efficient if the aim is to integrate the target company's business into the buyer's company immediately. A merger may also be desirable for accounting reasons, and the arrangement can, under certain conditions, be carried out as a tax-neutral restructuring. Tax neutrality does, however, require an assessment of the consideration and the other terms.

Succession within the family

A change of generation is a special case of an acquisition. The process is often more straightforward than a sale to an outside party, and the valuation may rest on different principles.

In family businesses, the arrangement is often carried out by gifting shares, in which case the recipient becomes liable for gift tax, but it is possible to obtain substantial reliefs on this and to extend the payment period for the gift tax. There are, however, certain conditions attached to the transfer of the shares, the holding period and the recipient's role. These include a family relationship between the parties, the transfer of at least a 10% shareholding, and the recipient's obligation to continue the company's business.

In practice, this can work when there is a family relationship, as defined by law, between the transferor and the buyer or recipient of the shares, and the next generation genuinely intends to continue the family company's business, because the succession reliefs come with a restriction on the further transfer of the company or business.

Share deal

A share deal is the most common form of corporate arrangement. In it, a shareholder sells the company's shares and receives in return the purchase price paid by the buyer. The buyer thereby acquires the rights and obligations that come with owning the company's shares. In a share deal, the company itself does not sell anything, and the arrangement does not usually affect the company's operational business. The company, its contracts, permits, staff and liabilities therefore remain within the company and do not technically change owner, so they do not need to be transferred separately, unlike in an asset deal. Change of control clauses should nevertheless be checked during due diligence, because individual permits or contracts may require consent or notification.

A share deal can, however, carry risks if the company has hidden liabilities, litigation or the like. In practice, a share deal is well suited to situations where the buyer wants to acquire the company in its entirety. A share deal can also be sensible from a tax perspective, particularly when the seller of the shares is another limited liability company.

Asset deal

In an asset deal, the selling company transfers the agreed assets and any obligations of its business (or part of it) to the buyer. The obligations, however, transfer only to the extent that has been agreed or that the law requires. In an asset deal, the buyer pays the purchase price to the selling company, not to the shareholders as in a share deal.

In an asset deal, each asset must be individually identified and transferred by contract, which makes it possible to buy only a limited part of the target company. An asset deal therefore also works as an alternative to the demerger mentioned earlier.

In an asset deal, the purchase price is taxable income for the selling company to the extent that it exceeds the acquisition costs not yet deducted in taxation. The selling company can deduct the undeducted costs from its result within the limits of tax legislation.

In practice, the incentive for an asset deal may be the purchase of a limited business, and its advantage over a demerger is that an asset deal can be carried out more quickly. From the buyer's perspective, another incentive may be that the buyer obtains, in the arrangement, a base from the acquisition costs that is deductible in taxation (for example, depreciation of fixed assets or amortisation of goodwill, subject to the conditions).