Notes on contracts when merging and m&a

In today’s business world, M&A deals have become an indispensable part of companies’ development strategies. From acquiring a small company to expand the scale of operations, to merging two large companies to create a new strength, M&A deals are increasingly becoming an important tool in achieving success and sustainable growth in a fiercely competitive market.

So what is M&A? 

M&A is the abbreviation of the phrase Mergers and Acquisitions. M&A are business activities in which a company or corporation makes acquisitions or mergers with another company or corporation to create a new entity that is larger in scale and can bring economic benefits to related parties. M&A is often used as a strategic tool to scale a business, enhance market position, grow rapidly or achieve other benefits.

M – Mergers  (merger): is the process by which two or more separate companies combine to form a new company or a company that will continue to operate but will be owned or controlled by the acquiring company. The purpose of mergers can be to increase the company’s size, competition, coverage, or to take advantage of various economic benefits such as increased profits, cost savings and increased shareholder value. There are many types of mergers, including horizontal mergers, vertical mergers and conglomerate mergers.

A – Acquisitions  (Acquisition): is the process by which one company acquires another company by purchasing all or part of that company’s shares. An acquisition may be made with the intention of gaining control or management of the target company, or to take advantage of the target company’s assets, manufacturing capabilities or technology. The acquiring company often has to pay a sum of money or exchange shares to buy back shares of the target company. Acquisitions are often used as a tool to increase the scale of operations, company coverage, or to expand the field of operations and increase sales.

The benefits of mergers and acquisitions (M&A)

1. Expanding business scale: M&A allows companies and corporations to expand their business scale by merging or acquiring companies others, enhance their competitive power and enhance their market position.
2. Rapid growth: M&A can help companies and corporations grow more quickly by merging or acquiring other companies that already have market share and customers.
3. Cost savings: M&A can help reduce production and management costs by sharing resources and systems of companies companies merge or acquire.

Current forms of M&A

Horizontal M&A: is a form of merger or acquisition of companies operating in the same industry or the same business field to enhance competitive strength and market share.

M&A along the supply chain (Vertical M&A): merging or acquiring companies operating in different links of the supply chain to create economic efficiency and reduce production costs.

Cross M&A (Conglomerate M&A): merging or acquiring companies operating in different industries or business sectors to grow sales and diversify product and service portfolios.

Restructuring M&A: merging or acquiring companies experiencing financial difficulties or inefficient operations with the purpose of restructuring their business activities to improve efficiency and profitability.

Leveraged Buyout (LBO): a company or a group of investors uses debt capital to acquire a company and use that company’s assets as collateral for the loan.

Each form of M&A has its own advantages and disadvantages, depending on the business goals of companies and corporations when implementing.

Investing in new fields: M&A can help companies and corporations invest in new fields or expand their product and service portfolios to increase sales and strengthen competitive strength.

Increasing value for shareholders: M&A can increase value for shareholders of companies and corporations through increased revenue and profits after merger or acquisition.

Notes when signing M&A contracts

First, Attention should be paid to guarantees and warranties.

This is a form that forces participating parties to ensure that the information provided is completely accurate at the time of signing. When drafting a contract, the participating parties must agree on this guarantee and warranty clause, which is the contractual obligation that both parties will be responsible for what they have declared and promised.

This is to eliminate the loophole. If this clause is only a declaration by the parties when entering into the contract, then basically according to the law, this will not be any legal basis to have the right to claim compensation for damages if one of the parties provides untruths and causes damage.

Second, mechanism for determining and adjusting prices

One of the important activities that can determine the future of the deal is business valuation. When participating, both parties need to clearly stipulate the relevant terms, because the results of this valuation depend on many different factors.

Additional attention should be paid to disputes that may occur in practice such as: Additional payments based on business efficiency; One party violates contractual obligations; Prerequisites; Reimbursement; Other disputes (usually labor and shareholder disputes).

Contract dispute issues that often occur in Vietnam

One is, breach of representations and warranties.

As mentioned above, this dispute is quite complicated and involves regulations as well as information that the parties have determined as a basis for entering into a contract.

Secondly,  mechanism for determining and adjusting prices.

Normally, when signing a contract, the parties will rely on a certain pricing and price adjustment method that has been agreed upon in advance. However, this problem arises when the parties have made one or all payments but have other price adjustment mechanisms immediately after signing the contract.

Tuesday, contractual obligations are violated.

After the transaction completion date, the parties will often review the company’s management and operation process and when they do not follow what was agreed, disputes will arise. Disputes often arise immediately after completing the contract.

Wednesday, request compensation for damages, fines for violations and late payment of interest.

According to Vietnamese law, upon violation, actual damages must be compensated. Parties often demand monetary damages because they find it easier and faster than requiring performance of obligations.

Finally, Shareholders’ disputes:

Based on the charter or agreement, shareholders’ rights arise. This issue is quite complicated and disputes often arise regarding control of the business.