Acquisitions: share purchase or asset purchase?
The appetite for mergers and acquisitions, both in the (re) insurance and capital markets spaces, continues to grow with little sign that the pace will let up any time soon.
Such growth and pace has been attributed to a desire on the part of companies to expand product lines and geographical footprints, become more effective, reduce overall costs, and compete with larger players.
Notable deals, particularly in the (re) insurance space and valued in US dollars, include:
• Partner Re's $2 billion acquisition of Paris Re in July 2009;
• The merger of CNA Financial Corporation with Hardy Underwriting Bermuda for $230 million in July 2012;
• The takeover of Flagstone Reinsurance Holdings by Validus Holdings for $623 million in November 2012;
• The merger of Canopius Holdings Bermuda with US property and casualty insurer Tower Group for $480 million in March 2013;
• Markel's takeover of Alterra Capital Holdings in May 2013 for $3.1 billion;
• The acquisition by Fairfax Financial Holdings of American Safety International Holdings for $250 million in September 2013;
• The recent acquisition of Platinum Underwriters Holdings by RenaissanceRe for $1.9 billion;
• The current $4.2 billion XL offer for Catlin; and
• The proposed amalgamation of PartnerRe and Axis Capital Holdings for $11 billion.
In recent years, companies have often used excess capital to buy back their own shares. But as share values have soared, share buy-backs have become less attractive and acquisitions more so.
While there has been a trend of mergers/amalgamations and share purchases noted in the media, an acquisition may also take the form of an asset purchase, which has notable advantages.
An asset acquisition involves the buyer acquiring the assets of a business only. Upon completion of the acquisition, the buyer owns the business, albeit in a new vehicle, and continues to operate it using the assets acquired.
While asset and share acquisitions achieve the same commercial objective, the legal consequences and practicalities of the two forms are quite different and should be explored with a view to determining which is best in the particular circumstances.
On a share acquisition, the underlying assets of the company are indirectly acquired by the buyer. Upon completion of the share acquisition, the seller accomplishes a clean break, as it were.
Conversely, an asset acquisition provides greater flexibility as the buyer is able to cherry pick those assets that it wishes to acquire. This is particularly useful where, for example, the buyer already has certain assets and it does not perceive similar assets for sale in the target company as adding value to its business — and, consequently, wishes to exclude such items from the acquisition.
One of the main advantages to a buyer of an asset acquisition relates to liabilities. On a share acquisition, all the liabilities of the company remain with it and indirectly become liabilities of the buyer. Accordingly, extensive investigations should be undertaken and wide-ranging warranties and indemnities secured in order to protect the buyer post-closing.
However, such contractual arrangements are generally insufficient to protect the buyer completely if, for example, the seller is unable to meet a warranty claim or there is difficulty establishing that a particular event is covered by a warranty.
Conversely, it is a feature of an asset acquisition that the legal liability to third parties for the obligations and debts of the business remains with the seller company, although a buyer may contract to assume certain liabilities. Where the buyer assumes certain liabilities via an asset acquisition, it may assess potential liabilities with a view to avoiding the risks associated with those that are unknown or unquantifiable.
A disadvantage of an asset acquisition is in relation to existing contracts entered into by the seller and third parties. Such contracts will not be automatically transferred to the buyer. They must be transferred either by assignment or novation, and the terms of such contracts may require the prior consent of the third party for an assignment of the benefit to be effective. Such consent may delay completion of the transaction considerably.
On the other hand, on a share acquisition, the assets of the company and all outstanding contracts with third parties often remain unaffected legally by the change of ownership — in such cases, there is no disruption to existing transactions.
It is imperative to note that existing contracts are to be reviewed carefully to determine whether there are clauses that permit a party to terminate the contract where control of the company changes.
Bermuda domiciled companies are prominent performers on the global stage with pressure to compete, grow and meet their commercial objectives. Acquisitions take several forms and occur for different reasons. Each type of transaction will have its unique set of evaluation criteria, expectations, deal terms, and covenants.
When considering a share or asset acquisition, the buyer should ensure that it only acquires that which it wants, and no more, for the best price possible. Likewise, the seller should minimise its continuing obligations while seeking the best price possible.
Lawyer Seth Darrell is an Associate and a member of the Corporate Practice Group at Appleby. A copy of this column can be found on the Appleby website at www.applebyglobal.com.
This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.