12 Acquisition of Shares in a Privately-owned
Company for Cash
12.1 Introduction
The basic acquisition form is the acquisition of shares in a privately-owned com-
pany by one private acquirer for cash. In this chapter, some preliminary questions
relating to the acquisition process will be studied mainly in that context.
Parties. The choice of the parties depends on the structure of the acquisition. In
an asset deal, the vendor is the owner of the business sold to the buyer. In a share
deal, only shares are sold, meaning that the actual business of the target company
is not owned by the vendor.
The fact that the target company is not party to the contract in a share deal can
give rise to certain legal problems. (a) The actual vendor may not have unlimited
access to information about the target company. Shareholders generally do not
have unlimited access to information about the company in their capacity as
shareholders. (b) The organs of the target company do not have a duty to permit
unlimited access to information about the company to existing shareholders or po-
tential future shareholders. (c) Whether the organs of the target company can per-
mit the disclosure of information depends on their general company law duties.
For example, members of the board of directors owe duties of care and fiduciary
duties to the company, and their actions are constrained by the principle of equiva-
lent treatment of shareholders in the same position. This also means that the target
company’s board, managing director, and other organs do not have a duty to al-
ways permit due diligence by the prospective buyer. (d) The party having unlim-
ited access to information about the company – that is, the company itself – will
typically not give warranties or indemnities to the buyer in a share deal.
Management of information. The acquisition process begins with information
management. All financial decisions are based on information. The acquirer’s per-
ceived risk is increased and the vendor will receive a lower price, unless the ac-
quirer is given access to information about the target and its business. However,
there is a risk that the acquirer will abuse the target’s business secrets. For this
reason, the parties use confidentiality agreements. More information is disclosed
to the prospective acquirer during the course of the acquisition process depending
on how likely the closing of the contract is. Information will therefore be disclosed
in phases that follow the signing of a non-disclosure agreement, the signing of a
letter of intent, the signing of the acquisition agreement, and closing.
P. Mäntysaari, The Law of Corporate Finance: General Principles and EU Law,
DOI 10.1007/ 978-3-642-03058-1_12, © Springer-Verlag Berlin Heidelberg 2010