Which forms of consideration are most commonly used?
Mergers & Acquisitions (2nd edition)
Cash is the most common form of consideration in M&A transactions in Hong Kong, particularly for an acquisition of an Offshore Listing Vehicle, and company shares as consideration is less frequently used. Other forms of consideration are also used depending on the tax positions of the seller and buyer.
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.
In public M&A transactions consideration is commonly cash, shares in the bidder or a combination of the two. The Code stipulates that certain consideration must be used in certain circumstances.
The Code requires a bidder to offer cash (or include a cash alternative) where the bidder or any person acting in concert with it has acquired for cash an interest in 10% or more of the shares of that class of the target company during the offer period or the 12 months prior to the commencement of the offer. The offer will also need to be a cash offer (or include a cash alternative) where the bidder (or any person acting in concert with it) acquires shares for cash within the three month period prior to the commencement of the offer period (or during the offer period if the target shares are bought at a price in excess of the offer price). In both cases, the cash offer must be at a value not less than the highest price paid by the bidder (or the person acting in concert with it) during the relevant period. Great care should, therefore, be taken by a potential bidder when considering whether to acquire shares in a potential target company before or during the offer period. The Panel may also require an offer to be for cash (or include a cash alternative) if it feels it is necessary to give effect to the general principle that target shareholders be treated equally.
The Code requires a bidder to offer securities as consideration in an offer where interests in target company shares representing 10% or more of the shares of that class have been acquired by a bidder (or any person acting in concert with it) in exchange for securities in the bidder in the 3 month period prior to or during the offer period.
In private M&A transactions, cash is the usual consideration offered by a buyer but buyers also offer share consideration as well although this is less attractive where the buyer’s shares are not publicly traded. For tax reasons, a buyer may offer loan notes to target shareholders.
The most common type of consideration used in M&A transactions is cash. In rare instances consideration may also be provided by way of shares or debentures. It is not uncommon that in some particular sectors other financial instruments or mechanisms are used (e.g. debt restructuring and refinancing).
The most common form of consideration is cash. M&A deals involving consideration in the form of stock or other form of securities is less common.
Cash is the most frequent consideration in non-listed deals.
For a public offer, the consideration may be, in principle, cash, shares, or a combination of both. However, if the shares exchanged are not liquid securities listed on an EU or EEA regulated market, the offer must include a cash option. This also applies should the bidder purchase, alone or in concert, shares in the target in cash exceeding five percent of the share capital or voting rights during the 12 months preceding the offer.
Cash or a combination of cash and scrip are the most common forms of consideration used in both public and private M&A transactions. The issue of debt securities or other means of deferred consideration are also often used in private M&A transactions.
For unlisted shares’ consideration may be cash and/or in-kind. As for listed shares, consideration for a tender offer may be all –cash, or mixed tender offer of cash or shares.
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.
Cash is the most common consideration in private M&A transactions. In public M&A transactions, the Consolidated Financial Act allows cash and share offers (and combinations of both).
However, in public tender offers Art. 106 of the Consolidated Financial Act requires a cash alternative (i.e., the duty to offer cash in lieu of shares) at the seller’s choice, under certain conditions: (i) if the shares offered are not admitted to trading on a regulated market, or (ii) if the offeror bought, in cash, shares representing at least 5% of the voting rights at ordinary shareholders’ meetings of the target company within the last 12 months. The rule is the expression of a general principle of equal treatment among all the shareholders to whom the offer is addressed.
The main forms of consideration are cash and/or securities in the bidder. Warrants and/or loan notes may also be offered.
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.
Consideration in an M&A transaction can be either in the form of cash or in kind (or a combination of both).
As regards to the takeover of public companies, the Public Takeovers Law contains specific provisions in relation to the consideration in such transactions. In particular, in accordance with section 16 of the Public Takeovers Law, the bidder may offer cash, shares or a combination of both. In case the offer is for cash consideration, the bidder must support the offer with a guarantee from one or more banks or other organizations or persons with the necessary capital adequacy.
The Public Takeovers Law also provides that in certain specific circumstances, the bidder must offer cash alternatives as part of the consideration. These are as follows:
“a) When the consideration offered by the offeror does not consist of liquid securities admitted to trading on a regulated market (in the Cyprus Stock Exchange) (the Commission may in such cases set the criteria taken into consideration when deciding whether the securities offered by way of consideration are liquid);
b) When a bidder has purchased shares in the target company within the last 12 months before the announcement of public offer has been made, which amount to 5% or more of the voting rights of the company, cash must be offered; and
c) When a bidder is exercising a ‘squeeze out’ and ‘sell out’ right, or in the event of a mandatory offer.”
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.
Consideration is most commonly in the form of cash. Such consideration can be financed through retained earnings or loans, but in the case of loan financing, in general the practice in Myanmar is not to deal with financing in the transaction documents because Myanmar’s banking sector is still developing. Such finance is generally obtained offshore.
In terms of financing Myanmar investments, it is generally understood that in practice all transfers of funds into or from Myanmar are governed by the 2012 Foreign Exchange Management Law. Prior approval from CBM is likely to be required in practice for loans, while equity fund transfers need only to be declared to CBM.
Any type of consideration can be provided for shares in private companies, while the most common form chosen is cash (in the form of bank transfers). As far as listed companies are concerned, the acquirer may offer securities, shares, cash, or a combination of the two. In relation to mandatory takeover bids, shareholders of a target company can opt for a cash-for-shares consideration.
In public M&A transactions, the bidder can make a cash offer (i.e., cash-for-share), an exchange offer (i.e., share-for-share), or a combined offer (shareholders may be offered a choice between cash or shares or a combination of cash and shares). In the case of an exchange offer, the bidder must offer liquid shares that are admitted to trading on a stock exchange in a country within the EEA. A cash offer is mandatory if the bidder has acquired more than five percent of the voting rights in the target for cash within six months prior to the announcement of the offer.
The majority of public offers involving German targets are cash offers. Share and combined offers are occasionally observed in mergers of equals such as the Linde Praxair tie-up, or in cross-border mergers.
In private M&A transactions, consideration is typically paid in cash.
In the context of a public offer, the consideration commonly used is cash but the consideration can also consist of securities or a combination of cash and securities.
The price is regulated in a mandatory bid context. It should be at least equal to the higher of: (i) the highest price paid over a period of 12 months before the announcement of the bid for the securities concerned by the bidder or a person acting in concert and (ii) the weighted average of the trading prices on the most liquid market for the securities concerned over the last thirty calendar days before the event giving rise to a mandatory bid (also see below – question 18).
The price in case of a voluntary offer can be freely determined by the bidder. The price should, however, allow the bidder to achieve the result it intends. The price should in principle be the same for all shareholders (also see below – question 18).
In a merger context, the shareholders of the company/ies that will be dissolved receive shares in the surviving or new merger company.
14.1 Cash is the form of consideration which is by far the most commonly used in Vietnam M&A transactions.
14.2 Share swap transactions are expressly recognised by Vietnam law and are increasingly used in Vietnam. There are, however, material regulatory difficulties associated with Vietnam-domiciled companies acquiring or otherwise receiving transfers of shares in the capital of foreign-domiciled companies, meaning that cross-border share swap transactions are difficult to implement and are rare.
14.3 It is possible for consideration to be paid by way of other in-kind forms such as assets, land use rights, technology, or intellectual property and this is done successfully in some cases. There are, however, material administrative difficulties associated with the use of these types of in-kind consideration in Vietnam, meaning that successfully completed transactions implemented on this basis are rare.
A bidder may offer cash, (listed or unlisted) shares or a combination of cash and shares. The vast majority of recent public takeovers were structured as all-cash transactions, including the two largest transactions in 2016 and 2017, Johnson & Johnson/Actelion and ChemChina/Syngenta. If the bidder offers non-listed shares (or if the offered shares are illiquid), a valuation by the review body is required. Under certain circumstances a cash alternative must be offered. In particular, a cash alternative is required in a mandatory offer (for details see question 25 below), or if in the twelve months preceding the tender offer the bidder has acquired at least 10% of the target's share capital for cash or if during the offer the bidder acquires any target shares for cash.
The majority of M&A deals provide for cash consideration for the shares being purchased.
However, in recent years the market finds 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, share 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.
The consideration mostly takes the form of cash (either paid directly or via escrow accounts). Share consideration is rarely used.
Cash and share issues.
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.
In private transactions cash is used as consideration in the vast majority of transactions. Consideration shares are however frequently used as partial consideration in transactions where the seller is reinvesting (including any roll-over management investments) in the target company (primarily in private equity deals). With respect to publicly listed companies, the consideration in a takeover offer normally consists of cash or shares in the offeror company, or a combination thereof.
The law allows cash and non-cash (e.g., shares of stock, other types of property) to be used as consideration. However, in practice, the most common form of consideration in the Philippines is cash. The use of cash as consideration has practical benefits. For example, for primary subscriptions, if the consideration is non-cash, the consideration must undergo a valuation or appraisal process with the SEC to ensure that the prohibition against issuance of watered stock is not violated.
The most common forms of consideration are:
- Cash; and
- Listed securities.
Loan notes may also be offered, but are less common.
Cash is the most commonly used form of consideration in both public and private deals.
Non-cash forms of consideration are much less frequently used; but, shares are used as a form of consideration in a share exchange, which is a type of statutory corporate reorganizations by which an acquirer acquires all the shares of a target company from its shareholders. It is also possible for an acquirer (including a foreign company) to establish a Japanese subsidiary and to cause such subsidiary to conduct a merger or share exchange in exchange for the shares of such acquirer (so-called triangular mergers or triangular share exchanges). However, in practice, the use of such triangular merger or triangular share exchange transactions is not common in Japan.
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 and shares are the most commonly used forms of consideration but loan notes may also be offered.
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.
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 International Stock 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.
Cash consideration is most commonly used in Turkey.
For publicly traded companies, when a mandatory tender offer is triggered by an initial share acquisition exceeding certain thresholds, consideration may be either in the form of cash or shares unless the selling shareholder specifically requires the payment to be made in cash.
Payment fully in cash or shares or a combination of both. The target company must also be mindful of the financial assistance restriction.
In Hungarian M&A transactions the parties usually stipulate money as consideration for the acquired participation. The consideration may be paid from various sources such as own funds or loan and on various terms. Consideration may be paid as a lump sum or in instalments and it may also be paid in advance into escrow (which is rarely the case). Most commonly, the consideration is paid upon closing and in certain cases the parties agree that the consideration is partly paid after closing (such as in case of earn-out arrangements or agreements on payment in instalments). Oftentimes, a part of the consideration is paid to escrow or it is withheld to cover potential warranty claims or other breaches.
In some cases, the transaction is partly or purely a swap, where the consideration provided by the acquirer can be shares in another company, or the undertaking of a certain obligation, performance of an agreed service, etc.
The Capital Market Act sets out more detailed provisions on the consideration payable in case of the acquisition of a public company by means of a public take-over bid. In such cases, the public takeover bid must specify the consideration. The consideration may be money and/or securities. However, when making their declaration of acceptance, the transferring shareholders have the right to request that the consideration be paid in money. The consideration must be covered by state securities issued by EU or OECD states, or bank guarantees issued by banks seated in the EU or an OECD state.