Ahead of the Curve: Potential Impact of Target’s Ownership on Acquisition
While few mergers or acquisitions can be considered routine, there are some instances in which the ownership structure of a target company can impact an acquiror’s approach to diligence and ultimately closing. An ownership structure unfamiliar to a buyer can initially create confusion or presumed unwillingness to transact but addressing such issues early in the diligence process can increase the likelihood of success. Examples of select ownership structures with distinct characteristics include:
Employee Stock Ownership Plans (“ESOPs”): ESOPs are essentially retirement plans for employees that invest primarily in the stock of the sponsoring employer.(1) ESOPs are often perceived as peculiar or complex and are not as common as other traditional structures. If pursuing a target that is structured as an ESOP, retaining tax and legal advisors with appropriate experience is critical. It is also important to ascertain if employees have voting rights to approve the transaction. If so, a buyer needs to factor additional timing into the closing process.
Cooperatives (“Co-ops”): Co-ops are more common in the agriculture, banking, and utilities sectors. A co-op’s priority is to provide goods and services to its members over the long term and at the lowest cost possible.(2) Member approval is an important issue of transacting with a co-op and is often completed at the end of the process. One example of a public entity successfully transacting with a co-op is the ScottsMiracle-Gro minority investment in Bonnie Plants, a wholly owned subsidiary of the Alabama Farmer’s Cooperative in 2016.(3)
Public vs. Private Entities: While publicly- or privately-owned targets are generally straightforward acquisitions, there are a few pertinent differences between the two that are worth highlighting, particularly if an acquiror is more familiar with one type versus the other. A key characteristic of a private transaction is the existence of a seller to indemnify the buyer following the transaction’s closing. In the case of a public target, no selling person or entity will exist post-transaction. This will impact negotiation of escrows, representations and warranties, post-closing indemnification and break-up fees. Another key difference is a public transaction generally requires a shareholder vote following the signing of a definitive agreement, while a private transaction is typically approved beforehand or concurrently.(4)
Acquiring a company with a less familiar ownership structure may seem daunting at first but is not a reason to abandon the pursuit. As with any acquisition, it is important to retain advisors with relevant experience to address legal, tax, valuation, and regulatory issues associated with various ownership structures. Having the knowledge of these potential issues and addressing them early in the diligence process will improve the likelihood of a successful transaction.