Private companies are typically acquired through share purchase or asset purchase, and out of the two, purchasing shares seems to be the more popular option. However, the structure of the transaction and acquisition process is typically dictated by tax considerations and the buyer’s intentions.
In a share purchase deal the buyer typically acquires all the shares of the target company, which means that all assets and liabilities of the target transfer to the buyer. In an asset deal, on the other hand, only selected assets of the target will transfer to the buyer. Because of the nature of the asset deal (i.e. only assets transfer, not the whole legal entity), more third-party approvals will likely be needed in connection with the transaction, which will create some extra hurdles.
Notification requirements. It should also be noted that if the target of the acquisition belongs to defence, security or holds a critical position in respect of maintaining vital functions of Finnish society (‘critical enterprises’), foreign buyer may need an approval for the transaction from the Ministry of Economic Affairs and Employment. Depending on the target’s industry, the law defines ‘foreign investor’ differently and foreign buyers’ obligations are different. If the target belongs to defence or security industry, the foreign buyer has to obtain an approval for the transaction. If the target does not belong to defence or security industry but is a critical enterprise, the buyer does not have an obligation to get such approval. In practice, the buyer of a critical enterprise is well advised to obtain the approval in advance to make sure the deal goes smoothly. Moreover, the buyer needs to acquire at least 1/10, 1/3 or 1/2 of the voting power of the target for this requirement to kick-in. Besides that, any possible competition and anti-trust issue should be cleared early in the acquisition process.
Kick-off & DD. The acquisition process is typically kicked-off with unofficial talks between the buyer and the seller followed by a letter of intent, which is a non-binding agreement (unless otherwise agreed between the parties in respect of all or some of the terms contained therein). Typically, the letter of intent states the indicative purchase price, timetable of the transaction, possible exclusivity, structure, and general terms of the transaction. In case the letter of intent does not contain non-disclosure undertakings, a non-disclosure agreement will be entered into before any sensitive information will be handed to the buyer in connection with the due diligence. After the letter of intent, the buyer will conduct a legal due diligence to check key corporate and commercial documentation, important agreements, employment matters, disputes, IPRs as well as environmental and regulatory matters. Financial due diligence will scrutinize the financial performance of the company by analysing the target’s income statements, balance sheets and cash flow statements, in addition to which, several financial ratios will be checked and compared with industry standards and benchmarks.
SPA. Once the due diligence is completed to the satisfaction of the buyer, the parties must reach a mutual understanding of the terms and conditions of the share purchase agreement. Typically, the following clauses will require at least a couple of rounds of back-and-forth: purchase price and possible adjustments, closing mechanism, warranties, limitations of liability, non-competition and indemnities.
Closing. Following the closing of the deal, the transfer of title to the acquired shares needs to be executed with corporate resolutions and other necessary agreements (e.g. share transfer agreement), necessary transfer taxes should be paid (1.6% tax rate in case of the target being a Finnish limited liability company), in addition to which the share and shareholder register of the target should be updated.
