20.6 Shareholders’ Capital 57920.6 Shareholders’ Capital
There are many ways to finance an acquisition by issuing shares. (a) Shares can be
issued by the acquirer or a company higher up in the ownership chain. In the latter
case, the investment of that company in the acquiring company can be in the form
of debt, equity, or mezzanine. (b) Shares can be offered to the public, or the offer-
ing can be a private placement. (c) Shares can be offered to the company’s exist-
ing shareholders, new investors, or the vendor or vendors as consideration for the
target. (d) There can be different categories of shares. (e) Shareholders’ capital can
also be used as a form of acquisition financing after the restructuring of the ac-
quirer’s and the target’s finances. (f) And finally, the acquisition can be financed
by issuing shares before closing, at closing, and in the context of restructuring af-
ter closing.
Shares as a source of funding in general. Where the acquirer issues shares to its
existing shareholders or third parties who subscribe for those shares for a consid-
eration in cash, the acquirer obtains funds which enable it to pay the purchase
price in cash (for the legal aspects of shares as a source of funding, see section
5.10).
Shares as a means of payment. Where the acquirer issues shares to the vendor
as consideration for the target, the acquisition will be funded by the vendor, and
the acquirer needs to raise less financing from other sources.
The vendor is used as a source of funding in two cases: where the transaction is
a merger and the consideration consists of shares in the acquirer (as the company
that survives the merger); and where the vendor subscribes for shares in the ac-
quirer in consideration for shares in the target (share deal) or the target’s business
(asset deal).
Whereas mergers are subject to mandatory provisions of law that protect the
shareholders of each participating company (section 10.4.2), the issuing of shares
to third parties is constrained by existing shareholders’ rights and mandatory pro-
visions of law that protect both shareholders and creditors (section 5.4).
In both cases, the vendor may regard the transaction as an acquisition of a block
of shares in the acquirer. In that case, the vendor may require typical representa-
tions, warranties and covenants. This can raise some particular legal questions.
First, the enforceability of the acquirer’s representations, warranties and cove-
nants that relate to the acquirer itself and its business may be constrained by re-
quirements as to form applicable to the subscription of shares in general, the sub-
scription of shares against a consideration other than cash, or mergers.
Second, the enforceability of sanctions for breach of contract by the acquirer
may be constrained by restrictions on the distribution of assets to shareholders in
general or a particular shareholder.
Shares as a form of financing after restructuring. In a share deal, the target
company is often loaded with debt after a leveraged buyout and the merger of the
acquiring company with the target company. In an asset deal, the acquiring com-
pany may be loaded with debt. In order to reduce leverage or enable the exit of the
ultimate owners of the acquirer, shares may be issued to investors (section 5.10).