The Law of Corporate Finance: General Principles and EU Law: Volume III: Funding, Exit, Takeovers

11.2 Structures 393

Core differences between different structures. Let us assume that a company A
has five unincorporated divisions.^7 Company B can obtain one of those divisions
in alternative ways:

• Because the division is unincorporated, an asset sale is possible.


• However, the transaction can also be structured as a share sale. Company A can
  incorporate, for example, NewCo and transfer the assets of the division to
  NewCo in return for NewCo’s shares. Company A can then sell those shares to
  company B.


• In both cases, the consideration can alternatively consist of shares issued by
  company B. If the division is unincorporated, company A can subscribe for
  new shares in company B in exchange for assets. If company A has incorpora-
  ted its division as NewCo, a share exchange can be used instead of a share sale.
  Company A will then subscribe for new shares in company B in exchange for
  shares of NewCo.


• If company A has incorporated its division as NewCo, company A and compa-
  ny B can alternatively agree on a merger. When NewCo is merged with com-
  pany B, company A will receive shares of company B or other assets or a mix
  of securities and other assets as merger consideration.


• Even a division is possible. Company A can be divided into two new entities:
  RemainingCo that consists of the four remaining divisions, and the division to
  be separated from the rest. Company B can issue new shares as division consi-
  deration to the shareholders of company A.


• Company B can also buy company A’s shares from company A’s shareholders,
  divest the four divisions, and keep the division in which it has an interest.


• Instead of a sale, company B can propose a share exchange to company A’s
  shareholders.


• Company B can also propose the merger of company A and company B.

Each alternative has its legal advantages and disadvantages, and there are funda-
mental differences between the alternatives^8 ranging from conglomerate discount
to tax. The following is a short summary of some of the most fundamental differ-
ences.
Unlocking of conglomerate discount. Conglomerate discount can be a reason
for the acquirer to prefer a share deal or a merger rather than an asset deal.

• The acquisition of control over a conglomerate company can help the acquirer
  to unlock conglomerate discount when the assets of the company are divested.

(^7) This example is from Bainbridge SM, Mergers and Acquisitions. Foundation Press, New
York (2003) pp 160–161.
(^8) The list is a modified version of the list in Bainbridge SM, Mergers and Acquisitions.
Foundation Press, New York (2003) pp 160–161.