Here we compare domestic mergers against an asset transfer.
When choosing an asset transfer or domestic merger, companies will consider:
- the consideration to be paid: in an asset transfer, depending on the structure, consideration may be cash or non-cash. In a domestic merger shares must be issued with or without cash from the buyer, other than in cases of 'merger by absorption' where no consideration needs to pass;
- whether all or some of the assets, liabilities and contracts will transfer: in an asset transfer, the parties can pick and choose the assets, liabilities and contracts that will transfer. This is not possible in a domestic merger, unless certain assets and liabilities are transferred out of the company beforehand in a pre-transaction hive-out;
- the appetite for detailed due diligence: in a domestic merger, all assets and liabilities of the target company transfer to the acquiring company by operation of law, so a detailed due diligence exercise is advisable particularly for a merger between unrelated parties. This may not be the case in an asset transfer situation, where the amount of due diligence required will depend on the assets and liabilities chosen to transfer;
- tax considerations: there can be tax considerations to both asset transfers and domestic mergers, depending on the types of assets that are relevant and whether the parties are related or not;
- timing: an asset transfer can be a faster option than a domestic merger for related parties and even for unrelated parties in some cases, provided that no complicated third party consents are required. This is for a number of reasons, including that audited financial statements for the preceding three financial years of each company involved will not need to be made available for inspection by the shareholders of each company, which is generally the case for a merger;
- confidentiality: an asset transfer can be confidential while, at a minimum, certain filings are required to be made in the Companies Registration Office for domestic mergers which is publicly searchable; and
- whether the parties are related or not: where the parties are related, usually all options will be available depending on the circumstances. Often, the deciding factors in opting for an asset transfer instead of a domestic merger will be the desire for confidentiality and speed. Certain types of merger require that the parties be related, although they can be used in the context of a pre-sale restructuring for transactions between third parties.
The primary distinction between an asset transfer and a domestic merger, especially where the parties are not related, is that the level of due diligence required can be substantially reduced in the case of an asset transfer, meaning that the time and cost involved are also significantly reduced. This is because the parties pick and choose assets and liabilities that will transfer in the case of an asset transfer whereas, all assets and liabilities of the target company transfer to the acquirer automatically by operation of law in the case of a domestic merger. In a domestic merger less transaction documentation is required than would be required for an asset transfer, as the merger takes effect in accordance with the provisions of the 2014 Companies Act (by operation of law). An asset transfer may require certain additional transfer documentation, such as assignments of particular assets and liabilities.
In the context of a domestic merger, the transfer of all the target company's assets and liabilities to the acquiring entity by operation of law can be a significant disadvantage. If certain assets or liabilities need to be excluded from the transfer these would need to be 'hived out' in advance of the merger, or the asset transfer route should be chosen.
If a summary approval process (SAP), rather than the court process, is used to approve a domestic merger, the directors of the companies will be required to make a statutory declaration including a declaration of solvency in respect of the companies, which may result in personal liability for those directors for all debts and other liabilities of the target company or the successor company if the declaration is not made on reasonable grounds. If the directors of the companies are not willing to provide a statutory declaration in these circumstances, the court procedure for approving the merger would be required which can be expensive and time-consuming. For more on domestic mergers and the SAP process, see our separate Out-Law guide.
A court or SAP approved domestic merger will not be confidential, as they come with certain filing and publication requirements. An asset transfer can be confidential. The publication requirements may also present timing issues for completion of certain mergers.
Once an asset transfer is completed, the transferring company can then enter into a voluntary liquidation process if it is no longer required, with any assets and liabilities left in the transferring company dealt with by the liquidator as part of that process. This voluntary liquidation process is not immune from challenge by shareholders or creditors. The duration of the voluntary liquidation process can be lengthy, and can be longer than that of a domestic merger.
Oisín McLoughlin is a corporate law expert at Pinsent Masons, the law firm behind Out-Law.com.