Corporate mergers and acquisitions: differences, tips and benefits

Mergers and acquisitions (‘M&A’) are strategic tools that allow companies to expand, diversify and increase their competitiveness in the market. Through these operations, companies can take advantage of synergies, optimise resources and improve their market share. However, such transactions involve a number of legal, fiscal and operational complexities that need to be carefully managed.

Applicable regulations and standards

The legal framework governing mergers and acquisitions in Spain has recently been updated with the entry into force of Royal Decree Law 5/2003. This decree, in force since 29 July 2023, transposes Directive 2019/2121/EU, known as the ‘Mobility Directive’.

This regulation establishes a set of procedures for the structural modification of commercial companies, which includes operations such as:

• Transformation: change in the legal structure of the company without altering its existence.
• Merger: merger of two or more companies into a single entity, either through the creation of a new company or through absorption.
• Demerger and spin-off: the division of a company into several independent entities or the transfer of a specific branch of business.
• Global transfer of assets and liabilities: transfer of all assets and liabilities from one enterprise to another.
• International transfer of domicile: change of the company’s registered office to another country.

These structural changes require careful regulatory compliance and the obtaining of specific approvals and licences, depending on the transaction.

Reasons for a merger or acquisition

There are multiple reasons that may motivate a company to carry out a merger or acquisition, among which the most important are:

• Creation of synergies: the combination of two or more companies can generate greater value than the individual entities, allowing for resource optimisation and cost reduction.
• Tax reasons: Mergers and acquisitions can take advantage of deductible tax losses, thus optimising the company’s tax burden.
• Excess cash flow: in cases where a company has excess cash, acquiring another company can be an efficient strategy to generate greater profitability.
• Risk diversification: entering new markets or acquiring companies with special characteristics can help diversify business risk.

Types of company acquisitions

Acquisitions can be classified according to the relationship between the companies involved:

1. Horizontal: acquisition of a competing company. The main benefits include cost savings, increased revenues and expansion of market share.
2. Vertical: acquisition of a customer or supplier. This type of transaction reduces contractual and transaction costs, as well as securing the supply chain.
3. Investment: when a private equity investor acquires a company (target), with the intention of enhancing its value for eventual resale or IPO.

Buying and selling of shares vs. global transfer of assets and liabilities

The choice between a sale and purchase of shares and a global assignment of assets and liabilities depends on various considerations, including tax considerations, and will result in a different approach to the transaction.

Sale and purchase of shares:

• Advantages: the transaction is generally simpler, as only a single asset (the shares) is transferred. The liability of the transaction is limited to the transfer itself.
• Disadvantages: it may involve the transfer of hidden contingencies, and in cases where there are multiple partners, the negotiation may be complicated.

Global assignment of assets and liabilities:

• Advantages: allows for greater selection of assets and liabilities to be transferred, which can reduce risks. In addition, no hidden contingencies are inherited.
• Disadvantages: it is a more complex transaction as it involves several assets, requiring numerous consents, approvals and licences.

Common stages of an M&A transaction

An M&A transaction generally follows several phases, including:

1. Identification of the target and evaluation of the transaction: deciding whether to buy or sell, engaging external advisors and preparing key documentation such as the Memorandum of Information or Letter of Intent (‘LOI’) and the Non-Disclosure Agreement (‘NDA’).
2. Due Diligence Procedure: conducting audits in various areas such as tax, legal, labour, financial, and environmental. This phase is critical to making an informed decision on the transaction.
3. Negotiation and closing of the transaction: includes the signing of the share purchase agreement (‘SPA’) or asset transfer agreement (‘APA’), and the fulfilment of conditions precedent, such as antitrust clearances.
4. Post Closing: integration of the businesses and execution of warranties, price adjustments and deferred payments.

Due Diligence

Due Diligence is a process of thorough investigation of a company, business unit or assets to be acquired. This process covers various areas such as financial, tax, legal, labour, intellectual property, real estate and environmental. This operation is fundamental to identify risks and opportunities in the transaction.

Share purchase agreement (‘SPA’) vs. asset transfer agreement (‘APA’)

The share purchase agreement and the asset transfer agreement are two of the main instruments used in M&A transactions:

• SPA: regulates the purchase of shares in a company. It is not subject to specific regulation and is governed by civil law, particularly Article 1445 of the Civil Code, which regulates the purchase and sale.
• APA: used for the purchase of a set of assets, rights and obligations of a company. This contract is unique, but must comply with the requirements and formalities for the transfer of each of the assets involved.

Conclusion

Mergers and acquisitions represent a powerful tool for business growth, but they also require careful planning and execution. Appropriate advice and a thorough due diligence report are crucial to ensure that the transaction delivers the expected benefits and minimises the associated risks.

Article written by

Roc Lamas

Attorney – Corporate and M&A

roc.lamas@metricson.com

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