1. Transaction structure
Under Indonesian laws, 2 alternative exists for shares acquisition in a limited liability (PT) company: (i) acquiring issued shares, and (iii) acquiring new shares which will be issued. The first form is a “simple” sale and purchase between the seller (being the current shareholder of target company) and the acquirer. All monies of the shares consideration will go the seller’s accounts and will be treated as income of process sale. If in the negotiated acquisition paper, the price is agreed in an assumption that all past liabilities of the target company will be the sole responsibility of the seller, parties need to find a way how to route the cash from the seller to the target company in such a way, so that the target company will use the fund the settle the past liabilities. For this issue, accounting issues come as more complex than legal issue, as to how to record the cash flowing from the seller to the target company, either as shareholder loan or rights issues. Both will surely change the scheme, and unfortunately, most of the “traditional” acquisition in Indonesian forget to put a clear provision on paper to deal with this issue.
The second form is acquiring new shares which will be issued by the target company and then subscribed by the acquirer – right issue. The pros for this form is – based on the above case – the target company will have sufficient cash in the account as result of right issue, without a need for the seller pumping fresh cash in to the target company. This off course will simplify the flow of monies and tax costs. For example, the acquisition price is USD10 mio and the debt is USD4 mio. We can combine the acquisition through first form, that is for the USD6 mio, and the balance USD4mio is through right issue. After right issue, the company will have fresh USD4 mio in the account and will utilize it to repay the debt. This form is also used if target company ‘s book records significant shareholder loan.
2. Tax consideration
In many transaction, especially acquisition, tax will be one of the important driving factors in determining a deal structure in acquisition. In shares acquisition, capital gain received by the seller will subject to corporate income tax of 25%, while if the capital gain is received by Indonesian individual(s), the income tax varies from 5% to 30%. Since company’s stocks are deemed as non taxable good, the shares acquisition will not subject to VAT. Acquisition of the newly issued shares (right issues) will not subject to any tax.
Having this figure number, the scheme of tax-efficient shares acquisition will target to have (i) less capital gain, (ii) combination of transaction on shore and off shore in countries with less tax tariff and (iii) combination between acquisition of existing shares and right issue.
3. Payment – cash vs equity
Payment method in acquisition deal is always be one of the discussion center. The 2 mechanism exists, cash payment or equity / stock “payment” by the acquirer. The cash payment is the least risky, liquid and a simple mechanism, where the buyer will pay cash amount to the seller’s account. While equity payment will involve equity in the acquirer, where the acquirer will issue some stocks for the seller equals to the value of the acquired shares in target company. This equity payment method is not free from risks, especially those related to valuation of the equity in the acquirer. For example, the acquirer tends to offer equity payment when it believes its equity is overvalued, thus will need more complex and sophisticated efforts to reach an equilibrium level.
4. Working capital adjustment
In an acquisition, the acquirer will seeks a condition where the target company has sufficient working capital to continue its operation after deal closing in a manner as previously conducted by the seller. This will also include financial obligation to third party such as vendor, bank etc. Generally, adjustment of working capital will be conducted in a certain period after closing (eg. 30 or 60 days) to give a room for completing the balance sheet or financial statement of target company. The delta between the available working capital and the required working capital will be deductive to the shares price.
5. Representation and warranties
The acquirer will seeks in the acquisition agreement detailed and broad representation and warranties with respect to matters as authority to sign and sell, assets, operation, tax, claim, intellectual property rights, compliance with laws and regulations, employment, material contract. Any breach of this rep and warrant provision can trigger the use of the indemnification or default clause. On the other side, the seller may use of “letter of disclosure” as insurance for this rep and warrant, by which the acquirer will be deemed aware and acknowledge all matters disclosed by the seller during the due diligence period. Going forward, it is very critical for the acquirer counsel to review the disclosure letter making sure that all information in the letter are reviewed and considered.