In the merger and acquisition transaction (M&A), payment is one of the most important phases. There is no payment method that fits all M&A transactions. Depending on the specific factors of each transaction, the parties can design appropriate payment terms. When it comes to the payment process in M&A transactions, the following factors should be taken into consideration.
1. Deal-Size and execution time of the deal
For some domestic and simple M&A deals, the parties can agree upon the lump-sum payment or two installments of payment by bank transfer. However, in case of complicated transactions with a long execution time, the buyer can request installments of payment based on the progress of complying with the condition precedents of the transaction. By contrast, the seller can ask for a specific payment method that can ensure the buyer’s financial ability, for example, the requirement for opening an escrow account at a lawful credit institution. This method is often used for cross-border or complicated M&A transactions.
Relevant article: Note in negotiating payment periods in M&A transactions.
Each country has its own regulations on tax and foreign-exchange management. Therefore, the tax consideration plays an extremely significant role, especially in M&A transactions in which the seller has a commercial presence in many countries. By which, the seller has the right to select a specific juridical person for the acquisition to take advantage of tax and finance regulations in that country. In some transactions, the parties may carry out the payment in a foreign country to take advantage of tax.
3. Fees for making payment
Unlike the payment method of bank transfer in simple or low-valued M&A transactions, the parties to the complex and long ones are more likely to opt for one payment method or the combined ones that can request the involvement of one or many third parties during the payment process. For some payment modes, the fee for making the payment can cost a fortune. For example, in transactions using the escrow account at the credit institution or of a third party, such as lawyers, the account management fee can be calculated by the percentage of the frozen value. Thus, the parties should negotiate and agree on who will be in charge of paying the service fee to the credit institution.
4. Friendly or hostile transaction?
In a hostile M&A transaction with a complete lack of confidence between the parties, the payment terms are more likely to be rigorously stipulated. For ensuring the payment, the third parties’ participation may be requested by the seller or the buyer when the payment conditions are met. The conditions of arising payment obligation are listed and agreed upon specifically.
5. The buyer’s level of confidence in a surge in the acquired shares or capital contribution portions value after the transaction
It is clear that, among other things, the buyers tend to choose the method of payment by shares due to their confidence shortage. In this case, the sellers shall be jointly suffered a part of the risk of a decrease in the value of shares or capital contribution portions.
Accordingly, the buyers can use their own shares as the payment for acquired shares of the target companies instead of cash payment or they can combine those payment methods. By which, the buyers shall become the owners of the target companies, and the sellers (shareholders of target companies) will become the shareholders of the buyers.
Swapping shares between companies is universally utilized for public companies. Besides, this payment method is officially acknowledged by some legal documents enacted by the Government and the Ministry of Finance.
6. Motivating founders and leaders of the target companies
For some transactions, the buyers would like to maintain founders’ and leaders’ dedication to the target companies. In some cases, the founders and leaders may also be the sellers. In this case, the buyers can pay the sellers for a part of the acquisition price by the payment method of income based on the development of the target companies after a specific period. Therefore, the higher the growth rate of the companies is, the more enormous the income payment for the sellers will be.
Disclaimer: This article is for general information only and is not a substitute for legal advice. Apolat Legal is a Vietnamese law firm with experience and capacity to advise on matters related to M&A Consulting . Please click here to learn more about our services and contact our lawyers in Vietnam for advice via email email@example.com.