Which forms of consideration are most commonly used?
Mergers & Acquisitions
Cash, although some companies started to use equity as part of the consideration or in the context of contingent payments, ratchets or guaranteed IRRs. These alternative methods however highly depend on the reliability of the scrutiny of the listed companies. I believe that as the country and its capital markets develop one will more and more see that happening.
Our recent experience has seen shares, cash or a mixture of the two depending upon whether the transaction is a pure acquisition or more of a merger amongst equals.
British Virgin Islands
Under BVI law parties are generally free to contract as they wish with regards to terms, price and nature of consideration. However, if the constituent BVI company is a regulated fund under SIBA consideration for issued shares must be cash unless the Commission has consented in writing or where permitted by the regulatory code issued by the Commission.
Again, parties are generally free to contract as they wish with regards to terms, price and nature of consideration. However, in the context of a merger, where dissenters have the right to be paid the fair value of their shares in cash, a share-for-share deal may add complexity.
Where an acquisition is structured by way of a merger or scheme of arrangement, differing consideration can be paid to shareholders (including to holders of the same class of security). For tender offers utilising a statutory squeeze-out, the same ‘offer’ must be made to all shareholders. There are no statutory or common law obligations to purchase other classes of target securities.
ZL: Cash, shares and assets are all commonly used consideration in acquisitions and the form of consideration in each specific acquisition will be determined by the type of the transaction and the applicable laws. In acquisitions which involve material asset restructuring of listed companies, shares and assets are more frequently used as consideration to achieve the purpose of company restructuring. In terms of Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors, foreign investors are allowed to use shares issued by foreign companies as consideration to acquire domestic enterprises. And in accordance with the Measures for the Supervision and Administration over the Trading of State-owned Assets in Enterprises and relevant regulations, in acquisition involving transfer of state-owned shares, cash will be normally required as the consideration. In acquisitions of non-listed companies which don’t concern transfer of state-owned shares, acquirers have more flexible options as to the form of consideration.
In private deals, cash is the most common form of consideration. Share consideration is seen as an alternative in public merger and tender offer structures but even then it may be difficult to structure transactions to allow for tax-free share exchanges given that typically, even a limited cash component prevents such favourable tax treatment. Combining cash and shares may also create challenges with respect to the statutory equal treatment of shareholders.
The most common consideration in a private M&A transaction is cash. Shares in the acquiring company are also often used as consideration. In public M&A the Takeover Act allows cash or share offers (or combinations of both). In the case of a takeover or a mandatory offer, the offered shares have to be liquid, which means that they are easily tradable, and they must be listed on a regulated market in the EEA. In Germany, cash offers are more common than share-for-share offers (or a consideration consisting of a combination of cash and shares). In the case of either a voluntary or a mandatory bid intended to acquire control, a cash consideration (or a cash alternative) must be offered if the bidder (including any of its subsidiaries or any concert party) has acquired at least 5% of the shares or voting rights in the target against a cash consideration during the six months prior to the announcement of the decision to make an offer and ending at the end of the offer period.
The most commonly used form of consideration in Greece is cash, followed by consideration in the form of securities. Other contractual arrangements are also, less frequently used, such as earn-out conditional payment, especially when seller is also key manager and remains active in the target company for an interim period post acquisition.
In case of companies listed on the Athens Exchange and more specifically in case of a take-over bid, it must be noted that a distinction must be drawn between the cases of mandatory bids and voluntary bids. In cases of mandatory take-over bids, the consideration is always in cash per share and is computed on the basis of a specific rule found in Law 3461/2006 on take-over bid rules while in cases of voluntary bids the consideration may take both the form of cash or securities or both.
Cash and shares are the most commonly used forms of consideration but loan notes may also be offered.
If the Takeover Code applies with respect to a mandatory offer, the consideration must be in cash, or be accompanied by a cash alternative of at least equal value, and must comply with the minimum price rules.
Isle of Man
Forms of consideration most commonly used are cash, shares and loan notes. The prohibition against financial assistance has been abolished save in respect of public companies formed under the 1931 Act and their subsidiaries.
If the Takeover code applies with respect to a mandatory offer, the consideration must be in cash, or be accompanied by a cash alternative of at least equal value, and must comply with the minimum price rules.
Cash is most commonly used consideration in connection with acquisitions of both non-listed and listed companies in the Norwegian market. Shareholders normally prefer to be paid in cash. The reason being that it is often difficult to evaluate the future value of other forms of consideration in a volatile macro-economic environment, at least compared with the certainty of receiving cash. In addition, it is far more complex for a bidder to offer settlement in shares, due to the amount of information that is required to be published and the process for finalising the bid documentation.
In a mandatory takeover offer situation, the STA also prescribes that the consideration must be in cash. However, it is possible to offer alternative forms of consideration (namely stocks in the bidder), provided that an option to receive the total offer price in cash is made available and that this option is at least as favourable as the alternative settlement.
There are no statutory limitations under Norwegian law as to what type of consideration that can be offered to shareholders in a voluntary offer.
Sometimes, the buyer proposes to settle the purchase price (or, maybe more often, parts of it) through deferred consideration (vendor notes), or by issuing consideration shares in the buyer or in the buyer's parent. Consideration shares as consideration is often combined with cash. In situations where the buyer and seller do not agree on the value of the target, it is not uncommon that the buyer seeks to bridge the gap by offering the seller an earn-out.
The majority of M&A deals provide for cash consideration for the shares being purchased.
However, now the market find itself in a situation of low availability of loan financing. In addition, real estate development and certain other businesses are overburdened with debt. As a result, we are aware of several substantial deals which were busted because of the buyer’s inability to secure financing for the transaction.
Accordingly, alternative consideration arrangements are encountered more often, providing, for example, for the buyer’s assistance or investment in relation to another project, shares’ exchange transactions, etc. At the same time, sellers are sometimes expected to provide long term post-completion support to the sold business, and post-completion operational results influence the ultimate consideration obtained by the seller.
There is no defined market for consideration in public transactions, given that there has only been one such transaction under the new regime. There are, at least in theory, instances where cash is compulsory under the M&A Regulations; in a mandatory offer the offeror must offer a cash alternative not less than the highest price it paid for target shares in the 12 months prior to the announcement of the offer.
In most private acquisitions, cash consideration is the norm, though equity and share swaps are increasingly used where the acquirer is a listed company.
Cash is the most commonly used form of consideration for all types of acquisitions, followed by shares of the acquirer in the case of listed companies. Shares of the acquirer’s parent company are sometimes used, but this is less common. Other forms of consideration are rare.
In most cases, cash is the form of consideration. There are also cases where consideration is shares in another company (i.e. share swap), but these cases are rare. A share for share acquisition involving the issue of new shares by an acquirer for a non-cash consideration does not as a matter of law require a valuation but directors of a listed company as a practical matter will obtain one from a financial adviser for liability reasons.
Consideration in cash or in kind are acceptable in private and public acquisitions alike. In an offer for shares in a listed company, an offeror may offer securities, cash or a combination of both, so long as a cash consideration is offered as an alternative in all cases. An expert’s report on the consideration offered would need to be annexed to the offer document.
Mergers are effected by the issue of shares to the shareholders of the companies being acquired or to the shareholders of the newly-formed company. A cash payment is also permitted provided this does not exceed ten percent of the nominal value of the shares so issued.
The most common form of consideration in share and asset deals is cash payment. Acquirers also often seek to have a part of the purchase price escrowed as security for potential warranty claims of the buyer. The escrow amount then is typically paid out to the seller after the expiration of the general warranty period in case no warranty claims have been filed.
Over the past few years the use of earn-out clauses (that are a preferred instrument of buyers) has increased, meaning that a part of the purchase price is only paid out post-closing if the target achieves certain milestones over a defined time period. Given the competing interests of sellers and buyers earn-out clauses bear a high risk of conflict.
Federal and state laws impose essentially no limitations on what a buyer can offer as consideration. However, in private company deals the consideration is typically all cash, whereas in public deals it is generally cash, stock or a combination of both. In certain circumstances, sellers in private deals may agree to the payment of earn-outs—graduated additional payments made by the buyer to the seller based upon the target company’s post-closing performance as measured by agreed-upon metrics (e.g., revenue, EBITDA, etc.). Similarly, public company deals may include contingent value rights—lump-sum payments made by the buyer to the target shareholders after closing upon the post-closing occurrence (or non-occurrence) of events largely outside the control of the buyer, seller or target company (e.g., FDA approval of a particular drug).
In determining what to offer as consideration, buyers typically consider several factors. Key among these are their financial condition and cost of capital; if securities are to be issued, what effect, if any, the issuance might have on their market price; whether target shareholders have any preferences with respect to the form of consideration; corporate and securities law considerations (e.g., the ability to comply with applicable disclosure requirements in connection with the acquisition and afterwards if securities are issued); and the tax implications of a particular form of consideration.
Cash is the most common form of consideration used in Vietnam-based M&A deals, although consideration in the form of share or equity swaps is becoming increasingly common.
Cash and shares are the most commonly used forms of consideration but loan notes may also be offered.
Cash and shares are the most commonly used forms of consideration but loan notes may also be offered (with the notes themselves becoming listed on the Channel Islands Securities Exchange).
Where the Takeover Code applies, the consideration must be in cash, or be accompanied by a cash alternative of at least equal value, and must comply with the minimum price rules.
We mostly see funds as consideration for M&A deals.
Cash or cash and scrip are the most common forms of consideration – under both takeovers and schemes of arrangement.
In UK public mergers, the following forms of consideration are most common:
- shares; or
- a combination of cash and shares.
In the UK market during the first half of 2016, cash has been by far the most commonly offered form of consideration.
Taking into account the depressed value of the pound and the continuingly ready availability of debt financing at low rates of interest, it seems likely that cash will continue to be the most popular form of consideration in the near term.
The Code prescribes certain circumstances where a particular type of consideration must be offered.
An offer must be in cash (or accompanied by a cash alternative) if:
- the bidder (or any person acting in concert with it) has acquired an interest in shares in the target for cash at any time during the offer period and within the 12 months before its commencement and the shares represent 10% or more of the shares of that class in issue;
- the bidder (or any person acting in concert with it) purchases any shares in the target for cash during the offer period; or
- the Panel decides it is necessary in order to give effect to the principal that all target shareholders should be given equivalent treatment.
The Code requires a securities offer to be made if the bidder (or any person acting in concert with it) has acquired an interest in shares in the target in exchange for securities at a time during the offer period and within three months before its commencement, and those shares represent 10% or more of the shares of that class in issue. This rule is similarly intended to ensure that shareholders in the target receive equal treatment.
The same dynamics which currently make cash a compelling form of consideration in the context of public bids are also applicable in the private markets. Similarly, unlisted paper consideration will often be of limited attraction and, as a consequence, cash generally remains the preferred form of consideration on the private side of the market.
Sellers in Spain continue having main interest on cash, being paid fully at closing or partially delayed and conditioned to certain events. Earn-out and price adjustments agreements are also usual. We also see indirect considerations by means of, for example, transactional services agreements: payment of leases, IP rights or other types of services rendered by sellers. Payments by shares or, in-kind contributions, are not so commonly used, although possible.