Which forms of consideration are most commonly used?
Mergers & Acquisitions (3rd edition)
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.
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.
The form of consideration most commonly used is payment in cash. In direct mergers shares of the resulting company are offered to the shareholders of the merged entities. Other forms of consideration are uncommon.
According to the Takeover Act, the bidder may offer, as a consideration for the shares that are the subject of the takeover bid, the following:
a) Money (cash compensation);
b) Substitute shares (substitute fees); or
c) A combination of cash and substitute shares in which case the bidder’s proportion of cash and substitute shares can be freely determined (combined compensation).
When a bidder offers a substitute or a combined consideration, it is obliged to offer a monetary compensation as an alternative. Shares offered as payment must be (i) listed on either the same exchange market or another exchange market having at least the same level of transparency; (ii) of the same type; and (iii) without any encumbrances.
HANFA further prescribes the conditions under which the bidder may offer a substitute or a combined compensation in the takeover bid.
In private M&A transactions: The most common form of consideration in share and asset deals is cash payment. Acquirers also seek to have a part of the purchase price deposited on the escrow account as security for potential breaches of the seller’s guaranties, representation and warranties granted to the buyer in the SPA. The funds or assets are usually held by the escrow agent until it receives the appropriate instructions or until predetermined contractual obligations have been fulfilled. Money, securities, funds and other assets can all be held in escrow.
An earn-out clauses have become common means of compensation in M&A transactions – which usually envisage, as a contractual provision in the SPA, that the seller is to obtain additional compensation in the future if the business achieves certain financial goals, which are usually stated as a percentage of gross sales or earnings.
The most commonly used for of consideration is payment in cash.
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.
Cash is still the most frequently used consideration. In private M&A transactions, there is no limitation on the type of consideration that can be offered, i.e. cash, shares, securities or other convertible or exchangeable bonds.
In public M&A transactions, consideration may be paid in cash or shares. The market standard in the Czech Republic involving the public offers involving the Czech target companies are cash payments.
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 statutory merger or consolidation, 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 statutory merger/consolidation or scheme of arrangement, differing consideration can be paid to shareholders of a company or members of an LLC (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 of a company or members of an LLC. There are no statutory or common law obligations to purchase other classes of target securities, although the constitutional documents of the target should be reviewed to check for any ‘tag along’ or ‘drag along’ rights.
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.
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). Escrowed amounts may be agreed in view of a verification of R&Ws exercise. As far as listed companies are concerned, the acquirer may offer securities, shares, cash, or a combination thereof. In relation to mandatory takeover bids, shareholders of a target company can opt for a cash-for-shares consideration.
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.
However, shares are used as a form of consideration in a share exchange, which is a type of statutory corporate reorganization by which an acquirer acquires all the shares of a target company from its shareholders.
Furthermore, recently, there have been a few notable transactions in which shares were used as consideration by Japanese corporations by a method other than a share exchange, including the acquisition of Shire by Takeda and the acquisition of Quartz by Uzabase. In addition, the recent amendment to the Industrial Competiveness Enhancement Act and the proposed amendment to the Companies Act currently being considered by the Legislative Council of the Ministry of Justice are expected to clear certain restrictions under the current Companies Act for the use of shares as consideration. These amendments may open the door to more opportunities for using shares as consideration in stock acquisitions by Japanese companies.
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.
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 and shares are the most commonly used forms of consideration but loan notes may also be offered.
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.
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 most common form of consideration in M&A transactions in our jurisdiction is cash consideration. In some situations we have worked on cash and securities considerations.
While shares of stocks and other non-monetary properties are valid considerations under the law, cash is still the most preferred consideration for simplicity and efficiency. If stocks are issued in exchange for non-monetary properties, current SEC rules and regulations require the valuation or appraisal of these considerations to guard against the issuance of watered stocks proscribed by the Corporation Code.
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.
The most commonly used form of consideration is cash, although using shares or other securities as consideration is also possible.
The consideration mostly takes the form of cash (either paid directly or via escrow accounts). Share consideration is rarely used.
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.
Consideration can take the form of cash or securities. However, if the offer is made and the offeror has acquired securities in the target company within a six-month period before the commencement of the offer period, the offer consideration per security to the target shareholders of the same class must be:
14.1. Identical to or, where appropriate, similar to the highest consideration paid for those acquisitions.
14.2. Accompanied by a cash consideration of not less than the highest cash consideration paid per security, if securities that carry 5% or more of the voting rights were acquired for cash.
There are additional disclosure requirements if the offer consideration takes the form of payment in securities of the offeror.
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.
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.
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 issuance 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 a valuation from a financial adviser for liability reasons.
UAE laws contains no requirements concerning the form of consideration. Cash is the most common form of consideration used in acquisitions in the United Arab Emirates, although consideration in shares of a listed acquiror or any other form of consideration is acceptable. In the DIFC, there are general requirements that consideration must be cash or a cash alternative. In a public acquisition, share-for-share exchange is a common form of consideration under the statutory merger process.
Cash is the most common form of consideration. In certain cases, shares or a combination of cash and shares are also used.
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.
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 commonly used consideration. An issuance of new shares of the acquiror is also frequently used, especially if the acquiror is a public company.
The most common form of consideration in acquisition transactions is cash. Consideration may also be in the form of a share swap or in kind.
For Publicly Traded Companies, consideration may be cash or share swap or a mixture of both.
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 common form of consideration in M&A transactions in Hong Kong, particularly for an acquisition of an Offshore Listing Vehicle, with non-cash consideration such as shares less frequently used.
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: (i) the bidder or any person acting in concert with it has acquired for cash an interest in shares in the target company (a) which carry 10% or more of the voting rights in the target company during the offer period or the 12 months prior to the commencement of the offer period or (b) during the offer period; or (ii) where the Panel views it as necessary to ensure that all target shareholders are afforded equal treatment. Except with the consent of the Panel, the cash price offered must, in respect of (i), 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 Code also requires a bidder to offer securities as consideration in an offer where the bidder (or any person acting in concert with it) purchases for securities: (i) during an offer period and within the three months prior to its commencement, an interest in shares which carry 10% or more of the voting rights in the target company; or (ii) more than three months prior to the offer period, an interest in shares which carry less than 10% of the voting rights of the target company but the Panel views it as necessary to ensure that all target shareholders are treated similarly.
In private M&A transactions, cash is the usual consideration offered by a buyer, however, shares or loan notes may also be offered.
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.”
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.
Cash and share issues.
The most commonly used form of consideration used is cash consideration. To a lesser extent securities and debt claims (debt/equity swaps) are also used.