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
In the US, there are several types of entities used for business purposes, including:
C-corporations, S-corporations, limited liability companies and sole proprietorships.
Various forms of partnerships, including general partnerships, limited partnerships, limited liability partnerships and limited liability limited partnerships.
The C-corporation is most common and the limited liability company is becoming increasingly popular for privately-held businesses.
Restrictions on share transfer
Generally, shares in private entities are freely transferable. However, it is common for private entities to have restrictions on transfer in the articles of incorporation or bylaws, or similar organisational documents for other entities. Additionally, shareholders of a corporation can agree to transfer restrictions in a separate contract such as a shareholders' agreement.
Foreign ownership restrictions
All S-corporation shareholders must be US citizens or have US residency status. Dual-resident S-corporation shareholders can pose a problem for having a valid S-corporation. Additionally, simply forming a single-member limited liability company to hold S-corporation stock is not a solution because the single-member limited liability company can either be treated as a disregarded entity for US federal tax purposes or as a corporation (which is not a valid S-corporation shareholder).
There potentially are restrictions on foreign investment in the US where national security is a concern. The Committee on Foreign Investment in the United States (CFIUS) is authorised to review any covered transaction, which is defined as an acquisition that could result in an entity engaged in interstate commerce in the US being under foreign control. Potential acquisitions can be blocked and completed deals can be undone where a threat to national security is identified. Acquirers can request review by CFIUS as part of the acquisition process in order to obtain safe harbour protection provided in the Foreign Investment National Security Act of 2007.
Industries commonly affected include:
Banking and financial services.
Common ways to acquire a private company
A private company can be acquired through a purchase of stock, a purchase of substantially all the assets or a merger or consolidation under state law.
Share purchases: advantages/asset purchases: disadvantages
The main advantages of a share purchase/disadvantages of an asset purchase are:
Simplicity (the entire business is transferred subject to change of control provisions). In an asset purchase, all the assets to be transferred have to be identified and individually transferred. Third party consents and approvals are usually required and some licences or permits may not be assignable.
Business contracts are generally unaffected unless they contain change of control provisions.
If the target entity has a number of real estate holdings, a stock purchase may result in lower transfer taxes (however, some states have controlling interest statutes and transfer taxes may apply in a stock purchase).
There is a potential double tax charge for the seller on asset sales (on the sale of assets and the distribution of the proceeds of sale to shareholders).
Tax losses in the target can generally be carried forward when there is an ownership change, subject to annual limitations on the use of a pre-change loss to offset post-change income.
Unless there are specific requirements under collective bargaining agreements or similar union agreements, it is not necessary to inform or consult employees or unions on a share purchase.
In a share purchase, the buyer generally takes responsibility for all the target's employees. In an asset purchase transaction, a buyer only hires those employees of the target that the buyer chooses to hire. If the transaction results in a plant shutdown or a loss of employment of 50 or more jobs, then the parties will need to comply with the Worker Adjustment and Retraining Notification Act (WARN Act).
Share purchases: disadvantages/asset purchases: advantages
The main disadvantages of a share purchase/advantages of an asset purchase are:
The buyer can pick and choose assets that it wishes to acquire and generally leave liabilities with the seller. This also protects the buyer from any hidden liabilities undiscovered by its due diligence.
The buyer gets a stepped-up basis for tax purposes (allowing more depreciation expense for future operations).
An asset purchase avoids the necessity to negotiate with all shareholders and the burden of co-ordinating a number of minority shareholders.
Controlled auction sales are common means for selling a privately-held business. Generally, auctions are run by investment bankers advising the seller. With the assistance of the seller and attorneys advising the seller, the investment banker identifies likely buyers and prepares a confidential information memorandum. The investment banker will contact potential interested parties and, after signing a non-disclosure agreement, provide interested parties with a copy of the confidential information memorandum. There may be follow-up conversations and information exchanges between the investment banker and potential buyers.
After the initial review of the confidential information memorandum, the investment banker will inquire whether there is an initial indication of interest from the potential buyers. Based on those responses, the next step is for the potential buyers to access a data room and perform more in-depth due diligence. Management meetings would occur at this stage of the process as well.
Following the review of the data room materials and management meetings, the investment banker will seek to negotiate a letter of intent with the top prospect.
Investment bankers may also be engaged for a more limited process, to negotiate only with a specified list of potential buyers previously identified by a seller.
Letters of intent
Letters of intent are common in private acquisitions. Letters of intent are used to set out certain agreed terms in a potential transaction and provide an outline of basic deal terms. Letters of intent can be binding, non-binding or contain both binding provisions and some non-binding provisions.
In addition to introducing the parties, describing the structure of the transaction and the amount and type of consideration, it is common that the letter of intent be divided into binding provisions and non-binding provisions.
Common non-binding provisions include:
Description of the transaction structure.
Key employees who must be retained.
A summary of other terms of the proposed transaction, including an expectation that certain terms would appear in the definitive acquisition agreement such as representations and warranties, indemnification and conditions precedent to the obligation to close.
Common binding provisions include:
Obligations regarding access or co-operation in the due diligence period.
Obligation to conduct business in the normal course.
Obligation to file a notification under the Hart-Scott-Rodino Act (see Question 34).
Governing law and venue.
Break-up fee provisions.
Provisions for costs and expenses.
It is common that parties include exclusivity provisions in a letter of intent (see above, Letters of intent) or enter into a separate exclusivity agreement. Generally, exclusivity agreements are enforceable under US law.
The remedies for breach of the exclusivity agreement can include equitable relief such as specific performance, or payment of a break-up fee that may provide reimbursement for costs and expenses incurred by the buyer in the transaction. A buyer can negotiate for liquidated damages if the seller breaches the exclusivity agreement.
The non-disclosure agreement or confidentiality agreement is one of the first documents exchanged in an acquisition process. The most important element of the document is the definition of confidential information and how confidential information will be marked or designated. Other commonly negotiated issues include:
Carve outs or exceptions to the definition of confidential information.
Whether and how confidential information will be returned or destroyed.
The process for and obligations when there is legally compelled disclosure of the confidential information by the receiving party.
A disclaimer of representations and warranties regarding the accurateness of the confidential information.
The non-disclosure agreement provides that the prospective buyer will only use confidential information for the purpose of evaluating the acquisition and that both parties will keep negotiations secret. The letter may provide that the existence of the proposed acquisition itself should be kept confidential. It is common for the non-disclosure agreement to also contain non-solicitation covenants covering the seller's employees and customers.
Non-disclosure agreements usually provide that in addition to damages, the disclosing party has the right to injunctive relief and specific performance of the non-disclosure agreement.
Generally, the buyer is only liable for those specific liabilities that are assumed as part of the transaction. However, there are exceptions to this general rule. In asset deals, the buyer must consider the applicability of successor liability under common law. The test for determining when there is successor liability for a buyer varies among the states, so the law of the state in question must be checked.
Additionally, certain states have laws that shift liability for the seller's state taxes to the buyer if the seller does not pay the state taxes.
A buyer may also be liable for unfunded obligations under the seller's employee benefit plans and there could be a lien against the purchased assets for such liability, even where the buyer has not assumed liabilities under the seller's employee benefit plans.
Environmental liability is also an area of concern (see Question 35).
Some states have a bulk sales law that requires that a seller must notify its creditors and pay its taxes when there is a sale of assets. The laws of the applicable jurisdiction must be checked as many states have repealed the bulk sales law.
Some states have statutes that provide that a buyer is responsible for the withholding or other taxes of a seller if the seller does not pay the taxes. Again, the law of the applicable state jurisdiction must be analysed.
Common conditions precedent include:
Timely receipt of board and shareholder approvals (in an asset purchase, merger or where the seller of the shares is a corporate entity).
The seller's representations and warranties must be true and accurate.
The seller must have performed its covenants that were required to be performed before closing.
Any required third party consents must be obtained.
Any required governmental authorisations must be obtained, including anti-trust approvals, if applicable.
Due diligence on environmental testing and other matters must be completed to the buyer's satisfaction.
Receipt of tax clearance certificates.
Absence of litigation.
No claims regarding ownership of the shares or claims to proceeds from the sale.
The buyer has obtained its financing.
No material adverse change.
Seller's title and liability
There is no warranty implied by law for the sale of stock. Warranties of title, lack of encumbrances, and authority to transfer are essential terms in the share purchase agreement.
When purchasing membership interests or units of a limited liability company, it is vital that the buyer receive the economic and voting interests as well as understanding the procedures for becoming a substitute member of the limited liability company, which will be set out in the organisational documents.
A seller can be liable for pre-contractual misrepresentations and oral statements regarding the shares or assets. Most acquisition agreements include a merger clause, stating that the terms in the acquisition agreement constitute all the terms of the acquisition and there are no terms not contained in the acquisition agreement.
As an additional protection, a seller may request a non-reliance clause that specifies that the buyer is not relying on any representations or warranties that are not in the acquisition agreement.
It is less common for an adviser to be liable for a pre-contractual misrepresentation or a misleading statement, but claims against advisers are possible.
The main acquisition documents and who usually prepares the first draft are:
Share or asset purchase agreement (buyer).
Disclosure schedules qualifying the representations and warranties in the share or asset purchase agreement (seller).
Stock power or other stock transfer instrument, in a share purchase (buyer).
Bill of sale and assignment documents in an asset purchase (buyer).
The acquisition agreement in a stock deal and an asset deal may be very similar if the asset deal is a purchase of all or substantially all the assets of a business.
The acquisition agreement usually includes the following sections:
Description of the transaction structure and basic terms.
Representations and warranties regarding title to the shares or assets and other aspects of the operating business.
Certain covenants of the parties.
When there is a deferred closing, a section of conditions precedent to the obligations of the parties to close the transaction.
Indemnification obligations of the parties.
Effect of termination of the acquisition agreement prior to closing.
Miscellaneous or general contract provisions.
In an asset deal, the asset purchase agreement must address the following issues:
Identification of the assets being purchased and a description of them.
Specifying which, if any, liabilities of the seller are being assumed by the buyer. In a share purchase all liabilities remain with the operating business purchased. Generally, in a purchase of assets only specifically assumed liabilities are transferred to the buyer.
Parties to a share purchase agreement can choose the law of a foreign jurisdiction to govern the contract between the seller and buyer, although that is less common where a US person or entity is the seller. Even where the share purchase agreement specifies that the law of a foreign jurisdiction governs the contract, however, the law of the state of formation of the entity being purchased applies to the transfer of the shares. US federal and state securities laws also will still apply.
Warranties and indemnities
It is usual to draft a purchase agreement with representations and warranties and indemnification provisions. Usually, the representations and warranties are comprehensive and address numerous aspects of the seller's business, including the assets, liabilities, financial statements and most other aspects of the seller's operations.
Below is a list of representations and warranties commonly included in the acquisition agreement:
Title to assets.
Real property and personal property matters.
Employee and labour matters.
Employee benefit matters
Compliance with applicable law and permits.
It also is common for private acquisition agreements to contain negotiated indemnification provisions. The acquisition agreement will usually address the following issues related to indemnification:
Survival: the term following the closing of the transaction when indemnification is available.
Identification of the indemnifiable claims and who will be indemnified.
Limitations on the indemnification obligations of the parties.
Use of escrowed funds.
Limitations on warranties
It is typical for acquisition agreements to include a survival clause, that provides that the seller will only indemnify the buyer for breaches of representations and warranties that are reported during a certain period of time after the closing of the transaction. It is common that certain provisions are typically excluded or carved out from this limitation. Typically, the carve outs include the representations and warranties on the following items:
Depending on the facts of the specific transaction, the parties may negotiate longer survival periods for additional representations and warranties.
Qualifying warranties by disclosure
It is typical in an acquisition agreement for some representations and warranties to be qualified with exceptions that are listed or discussed in disclosure schedules, or in a disclosure letter that is part of the acquisition agreement.
Remedies include money damages and specific performance. Indemnification provisions are also common.
Time limits for claims under warranties
Parties to an acquisition agreement often negotiate specific time limitations for bringing indemnification claims. It is common for there to be a time limit that applies to most of the representations and warranties, with certain representations and warranties specifically carved out with longer time periods.
Often parties will negotiate that the indemnification provisions are the only remedies available to the parties. Otherwise, the parties have claims for common law breach of contract and under the US and applicable state securities statutes. The time limitations for bringing those claims vary by type of claim and the limits prescribed under state law.
Consideration and acquisition financing
Forms of consideration
Various types of consideration are used in US acquisitions:
Assumption of liabilities and obligations.
Factors in choice of consideration
The choice of consideration usually depends on factors such as:
The seller's tax considerations.
The seller's desire or willingness to participate in the potential growth in the value of the equity of the seller or the buyer after the closing.
The inability of the buyer to fully finance the acquisition.
If the buyer is a public company, it will generally issue shares in an underwritten public offering. Shares could also be issued in a private placement to one or more institutional investors.
Consents and approvals
Generally, the board of directors must consent to the issuance of shares and any significant acquisition. Shareholder approval may also be required in connection with the offering of shares, depending on the circumstances such as the state of incorporation, what stock exchange the shares are listed on, how the transaction is structured, and so on. Shares issued must be approved for listing by the applicable stock exchange.
Requirements for a prospectus
Unless an exemption from registration with the US Securities and Exchange Commission (SEC) is available for the offering of shares (for example, a private placement exemption), the offering of shares must be registered and a registration statement, including a prospectus, must be filed with the SEC and delivered to investors.
A private placement is likely to require the issuer to provide certain information in a private placement memorandum, depending on the size of the offering, the nature of the investors, the state jurisdiction and the requirements of the applicable exemption.
There are no such applicable restrictions in relation to a private company. A seller can provide financing through a promissory note. If there is a disagreement in valuation, the parties can use an earn-out to provide for contingent consideration based on post-closing performance of the purchased entity or assets.
See above, Restrictions.
Signing and closing
In a share purchase with a delayed closing, the parties enter into a stock purchase agreement. Often, forms of the ancillary documents to be delivered at the closing will be attached as exhibits to the stock purchase agreement.
In a share purchase with a delayed closing, the closing documents include the following documents:
Bring down certificate.
Employment agreements for key employees.
Opinions of counsel.
Contracts must be executed by a person having authority to do so on behalf of the entity. Typically, such authority is evidenced by a resolution of the board of directors or a certificate delivered by an officer of the entity. The acquisition agreement usually will contain a representation and warranty on the authority of the entity to enter into and perform its obligations under the acquisition agreement.
Documents conveying real estate have specific execution requirements, for example notarisation may be required under the relevant state law or a preparer's signature may be required. The law of the state where the real property is located must be analysed. Real estate records are filed locally at the county level and local filing requirements, such as margin requirements and other specifications, must be checked.
Although rarely used when executing documents in the acquisition of a privately held business, digital signatures are binding and enforceable. At the federal level, the Electronic Signatures in Global and International Commerce Act (E-Sign) became effective on 1 October 2000. Additionally, most states have adopted some form of the Uniform Electronic Transactions Act. State laws regarding certain contracts or conveyance documents (for example, deeds) or local filing requirements may require original signatures and must be analysed. It is common in private acquisitions for original signatures to be transmitted electronically via PDF.
The following formalities are required to transfer title to shares in a private company:
Execution of a written instrument of transfer (stock certificate or stock power form).
Production of the original stock certificate or execution of lost stock certificate affidavit with indemnity.
Satisfaction of any requirements in the articles of incorporation, bylaws or a separate shareholders' agreement.
Issuance of a new stock certificate.
At the federal level there is no transfer tax on the transfer of shares. There may be state laws that apply a tax on the transfer of shares (such as a stamp tax), so the law of the specific state jurisdiction must be analysed. Additionally there is federal, and usually state, income tax that applies when there is a gain recognised from the taxable sale of shares.
Some states and local jurisdictions have a controlling interest tax that applies to a sale of a controlling interest of an entity that directly or indirectly owns real property in that state. Because these are state statutes, the terms vary by state, including the definition of a controlling interest and the applicable tax rate. There are similar rules that apply at the federal level when a non-US party sells stock in a US corporation, and the fair market value of the US real property assets owned by the US corporation equals or exceeds 50% of the total fair market value of all assets owned by the US corporation.
States and local authorities impose fees or taxes for recording deeds for the transfer of real property. Certain states have a bulk transfer tax that applies when there is a qualifying sale of assets.
Because the potential transfer tax exemption is for a state tax, the law of the applicable state jurisdiction must be analysed. Even where a state has a transfer tax, certain transaction structures may be exempt.
Some states may have an occasional sale exemption applicable to a sale of assets. The law of the specific state must be analysed.
Stock transactions can be taxable transactions or tax-free transactions. In a taxable stock transaction, the seller must pay tax based on the gain from the transaction, which is the difference between the consideration (cash, property and liabilities assumed) received and the seller's adjusted basis in the stock. In a taxable transaction, the buyer takes a basis in the stock acquired equal to the purchase price of the stock. Because the stock is being acquired, and not the assets of the acquired entity, the tax basis in the assets of the acquired entity generally does not change.
If the sale of shares qualifies for capital gains treatment, then the capital gains rate (for 2015, generally between 15% and 23.8%) applies for individual sellers. Corporation sellers pay tax at 35% and the capital gains rate does not apply to corporate taxpayers.
In certain transactions, the parties to a transaction can agree to make an election under section 338(h)(10) of the US Internal Revenue Code, to treat a stock purchase as an asset purchase for most income tax purposes, giving the buyer a stepped-up basis in the assets of the acquired entity. However, this can result in the loss of historic tax attributes such as earnings and profits and losses.
Asset transactions can be taxable transactions or tax-free transactions. The taxable sale of assets for cash or other consideration is a taxable event. The seller must pay tax based on the gain or loss of the individual assets, determined by the difference between the consideration received for the asset and the seller's adjusted tax basis in the asset. The buyer will take a purchase price tax basis in the assets purchased, which allows for more depreciation of those assets in the future.
The tax rate depends on the seller (corporate or individual) and whether the asset is a capital asset to which the capital gains rate would apply (for 2015, generally between 15% and 23.8%).
A purchase of stock can be structured as a tax-free reorganisation if the stock is purchased solely for voting stock of the buyer and the buyer has control of the target corporation after the transaction. Generally, control means ownership of at least 80% of the voting stock of the target corporation, plus 80% of the total number of shares of all other classes of stock of the target corporation.
A purchase of substantially all the assets of the seller may be structured as a tax-free reorganisation if certain requirements are met. The requirements include such specifics as:
Whether the assets are purchased in exchange for voting or non-voting stock of the buyer.
Which entity or group of owners has control of the target entity after the reorganisation.
Whether the target entity is liquidated after the transaction.
In addition to federal taxes, the parties to a transaction may incur tax liability at the state and local level. In addition to state and local income taxes, other taxes and fees may be charged at the state and local level. For example, some states impose sales, use or other transfer taxes in a sale of assets. States and local authorities also may charge fees in a transaction, such as a filing fee for recording a deed for the transfer of real property. In stock transactions, some states impose a stock transfer tax or a controlling interest tax (see Question 25). In any transaction, the law of the applicable state must be analysed for tax consequences.
Corporations can file a federal level consolidated tax return if the controlling corporation in the consolidated group owns 80% of the voting stock of the controlled corporation, plus 80% of the value of all stock of the controlled corporation. If a corporation generates losses and is a member of a federal level consolidated group, the corporation's losses can in many instances be used against income generated by other members of the consolidated group.
There are limitations on the use of a corporation's pre-acquisition losses to offset post-acquisition income when the corporation with the losses undergoes a change in ownership. Annual limitations apply under sections 382, 383 and 384 of the US Internal Revenue Code.
Under US law generally, without negotiated contract rights otherwise, employment is an at will arrangement. Without contract rights, including the terms of a collective bargaining agreement, there is no obligation to inform or consult employees or their representatives in an acquisition, except where there will be a mass layoff or plant closing under the Worker Adjustment and Retraining Notification Act (WARN Act).
The WARN Act is a federal statute that requires 60 days' prior notification to affected employees and union representatives, if any, before any plant closing or mass layoff of employees involving an employment loss of 50 or more employees in a particular time period. The WARN Act notification obligation may affect the timing of the closing. Some states and local jurisdictions have laws similar to the WARN Act and may require notification when there are layoffs.
In an asset purchase, the buyer assumes only those contracts the buyer chooses to assume, and can hire the employees that the buyer chooses to hire on terms determined by the buyer and accepted by the employee. However, in certain circumstances this default rule may not apply, and a buyer may be required to bargain with the union that represents the seller's employees, and may even be bound by the same collective bargaining agreement where the buyer is a successor of the seller. The buyer is a successor where the buyer hires a substantial and representative number of the seller's employees and there is a substantial continuity between the enterprises.
In a stock purchase, the employment relationships and collective bargaining agreements remain in effect, if there are no change of control provisions. There are no specific notice obligations unless otherwise contracted for by an employee or in a collective bargaining agreement. The WARN Act obligations apply in a stock transaction just as in an asset purchase (see above, Asset sale).
Under US law generally, without negotiated contract rights otherwise, employment is an at will arrangement. The obligations regarding the employees of the entity being purchased depend on the treatment of the employees before and after the transaction closes and what contractual rights they have. In addition to review of employment agreements, the buyer must review any applicable collective bargaining agreement the seller has with any of its employees, and determine whether there are any obstacles to the acquisition or notification requirements associated with those contracts.
Employees remain with the purchased business in a share sale, if there are no specific change of control provisions.
Transfer on a business sale
Employees are automatically transferred in a share purchase, subject to agreements that contain change of control provisions. Employees are not automatically transferred in an asset purchase.
Private pension schemes
US companies can, but generally are not required to, offer a number of benefits to employees. Benefits can include:
Qualified pension plans (defined benefit plans, defined contribution plans and multi-employer pension plans).
Welfare benefit plans (for example, health benefits, dental, life insurance, accident, disability, and severance pay).
Executive compensation plans.
Defined benefit plans (also known informally as pension plans) exist in the US, but have become less common in recent years. Many employers have chosen to freeze or discontinue such plans. Defined contribution plans (in which employers and/or employees make stated contributions to the plan) are more common. Employers also may have obligations under a single employer pension plan or a multi-employer pension plan under a collective bargaining agreement.
Pensions on a business transfer
In an asset deal, if the buyer hires any of the employees of the target entity, the buyer must determine whether to assume the target's benefit plans and their related liabilities.
In a stock transaction, the buyer takes ownership of the assets and assumes the liabilities of the target entity as the new owner of the shares, including liabilities under the target entity's employee benefit plans.
In a merger, the surviving entity takes the assets and assumes the liabilities of the purchased entity by operation of law. If the buyer is assuming an employee benefit plan in a transaction, the buyer must determine whether the target entity has any liability for not making required minimum contribution payments.
Buyers and sellers may also have obligations and liabilities under the Consolidated Omnibus Budget Reconciliation Act 1985 (COBRA) to provide continuing benefits under group health plans. The new Affordable Care Act also provides new obligations for employers with 50 or more full-time equivalent employees to provide healthcare plans or pay a penalty tax for failure to do so.
Anti-trust inquiries into an acquisition may result from the US Department of Justice (DOJ), the Federal Trade Commission (FTC), attorney generals in the various states, or from complaints of competitors or other private parties.
Parties to a transaction must comply with pre-merger reporting and notification requirements, which are required for acquisitions meeting specified size thresholds:
Size of transaction test. An HSR filing may be required when the acquisition would give the buyer voting securities, non-corporate interests or assets, or a combination of them, of the seller valued in excess of US$76.3 million (adjusted as of 2015). The threshold is indexed to inflation and adjusted annually.
If the transaction is valued in excess of US$76.3 million (adjusted as of 2015), but is US$305.1 million (adjusted as of 2015) or less, an HSR filing is not required unless the size of person test is satisfied (see below).
If the value of the transaction is greater than US$305.1 million (adjusted as of 2015) the parties must submit an HSR filing, regardless of the size of the parties.
Size of person test. If the value of the transaction is in excess of US$76.3 million (adjusted as of 2015) but is US$305.1 million (adjusted as of 2015) or less, the parties are required to complete the HSR filing when one party to the transaction has total assets or net sales greater than US$15.3 million and the other party to the transaction has total assets or net sales greater than US$152.5 million (adjusted as of 2015). When determining the total assets and annual net sales for purposes of the size of person test, each party must look to its ultimate parent entity and the subsidiaries of the ultimate parent entity, not only the entities that are party to the transaction.
Even where the size of the transaction does not require pre-closing notification, authorities may investigate and challenge an acquisition. Certain exemptions may apply so that an HSR filing is not required, even where the test thresholds are met.
Notification and regulatory authorities
If the value of the transaction and size of the parties involved exceed certain thresholds that are adjusted for inflation (see above, Triggering events/thresholds), the parties must make filings under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) of 1976, as amended.
If applicable, the HSR Act requires pre-merger notification to the FTC and the DOJ, including a waiting period for investigation. The HSR Act prohibits certain acquisitions of assets or voting securities until 30 days (15 days for a cash tender offer or acquisition through the bankruptcy process) after the parties file a notification form with the DOJ and the FTC.
The purpose of the HSR Act is to:
Preserve the agencies' ability to investigate the competitive consequences of a transaction before closing.
Provide an opportunity for the agencies to obtain an effective remedy.
Reduce the likelihood that competition will be reduced during the HSR Act waiting period.
Even if there is no competitive overlap, the HSR Act still applies.
If either agency determines during the waiting period that further inquiry is necessary, it is authorised to request additional information or documentary materials from the parties to a reported transaction (known as a second request). A second request extends the waiting period for a specified period of time after all parties have complied with the second request (or, in the case of a tender offer or a bankruptcy sale, after the acquiring person complies). This additional time provides the reviewing agency with the opportunity to analyse the submitted information and take appropriate action before the transaction is consummated. If the reviewing agency believes that a proposed transaction may violate the anti-trust laws, it may seek an injunction in a federal district court to prohibit consummation of the proposed transaction.
The US anti-trust laws are intended to prevent acquisitions where the effect "may be substantially to lessen competition, or tend to create a monopoly". The analytical framework consists of three elements: markets, competitive effect, and entry and efficiencies.
The agencies first define the market affected, which includes the products being sold or services provided, and the geographic territory where the products are sold or services provided.
Next, the agencies analyse the likely competitive effect of the transaction. Generally, there are three kinds of mergers that may have an anti-competitive effect:
Horizontal mergers, which are mergers between two competitors.
Vertical mergers, which are mergers between a buyer and seller.
Potential competition mergers, which are mergers where one of the parties is likely to enter the market and become a competitor of the other.
Each kind of merger is analysed differently.
Finally, the agencies seek to understand whether other competitors will be enticed to enter the relevant market and whether efficiencies from the proposed transaction will benefit consumers and therefore off-set any potential harm to the consumers arising from the transaction.
US environmental laws are far-reaching and hold current and former owners and operators potentially liable for costs associated with the investigation and remediation of contamination. The liability imposed is both strict and joint and several. As a result, a company can be liable for clean-up costs of real property once used by it, regardless of whether the company was responsible for the contamination. Buyers may also be liable for environmental issues in subsidiaries that are no longer owned by the target entity.
In a stock transaction, the liability for environmental clean-up remains with the target entity and, indirectly, the buyer as the owner of the stock of the target entity. To minimise environmental risks, a buyer will negotiate for indemnification from a seller for any costs associated with the investigation and remediation of contamination that existed on the property before the closing.
In an asset purchase, a buyer can be responsible for environmental liabilities even where the buyer does not specifically assume such liabilities in the acquisition agreement. In an asset purchase, a buyer will require the seller to retain any environmental liabilities that existed before the closing. However, even then, a buyer could be held responsible under environmental laws if it becomes the owner of the contaminated property.
A buyer will want to take such actions necessary to qualify for the statutory defences available under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), that is, the:
Innocent landowner defence.
Contiguous property owner defence.
Bona fide purchaser defence.
To quality for one of these defences, it is essential that the buyer undertake all appropriate inquiry, which includes performing a Phase 1 Environmental Site Assessment in accordance with the procedures of the American Society for Testing and Materials Standard E1527.
Corporate tax on a share sale
Federal Trade Commission
Description. Official website of the Federal Trade Commission. A version of the website is available in Spanish.
Internal Revenue Service
Description. Official website of the Internal Revenue Service. Modified versions of the IRS website are available in Spanish, Chinese, Korean, Russian and Vietnamese.
W Ashley Hess, Partner
Baker & Hostetler LLP
Professional qualifications. Licensed in Ohio and Kentucky
Areas of practice. Mergers and acquisitions; corporate governance.
Regularly advises clients on a full range of corporate matters, with an emphasis on middle-market mergers and acquisitions, joint ventures and private capital investments.
M&A experience includes stock, asset and merger transactions for public and private companies, and advising privately-held business owners on sell-side engagements, including pre-sale due diligence preparation and auction processes.
Transactional work in a wide range of industries, including automotive, healthcare, online media and multi-unit franchised restaurants.
Active in the Mergers and Acquisitions Committee of the American Bar Association's Business Law Section.
Serves on the Market Trends Subcommittee that publishes the Private Target Deal Points Studies and is a frequent speaker on topics related to mergers and acquisitions and corporate compliance matters.
Listed in Chambers USA America's Leading Lawyers for business in the area of Corporate/M&A, and is recognised in Best Lawyers in the practice areas of corporate compliance law and corporate law.
Recent Developments and Trends in Middle-Market M&A Due Diligence Practices, Business Due Diligence Strategies (Aspatore 2013).
Thou Shalt Not Lie: Enforcement of Non-Reliance Clauses Under Kentucky Law, Co-Author, Northern Kentucky Law Review, 2008 Kentucky Issue, Volume 35, Number 2.