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Equity deal: What are the pros and cons?

Pros

Acquiring an operational business: acquiring equity does not require numerous separate approvals of each individual asset because the title of each asset lies within the corporation. The risk of renegotiation, or reapplying for new permits, lease, utilities, facilities and employment agreement is eliminated. However, special attention will be required for contracts with “change of control” provisions;

Maintaining contracts: if a company is dependent on a few vendors or customers, an equity purchase may reduce the risk of losing those contracts.

Cons

Liabilities: buyers accept more risks by purchasing the company’s equity, and it is more difficult to avoid existing unknown or undisclosed liabilities of the purchased business.

Higher levels of due diligence: equity deals may require more intensive due diligence and pre-deal restructuring.

Asset deal: What are the pros and cons?

Pros

  • Select the assets: asset acquisitions enable an investor to select which part of a PRC target company he wants to purchase;
  • Minimize the liability risk: usually, existing obligations, liabilities or restrictions of the target company will not be transferred and will remain the sole responsibility of the target company;
  • Reflecting the asset’s market value: asset acquisitions allow buyers to allocate the purchase price among the assets to reflect their fair market value. On the tax level, it allows a higher depreciation and amortization deduction and results in future tax savings.

Cons

  • Complexity of procedures for asset deals: the acquisition of a business will face regulatory and procedural constraints. Indeed, the creditors are required to confirm that they do not object to the transfer. Moreover, employment contracts cannot be automatically transferred and will have to be terminated and new contracts will have to be signed with the transferee. Third parties may also consider the transaction as a good opportunity to renegotiate their contracts, adding delay and costs to the deal;
  • Establishment of a PRC entity: when assets are acquired, it is necessary to establish a commercial presence in the PRC to use the assets for operational purposes, and approvals must be obtained from Chinese authorities. Therefore, the setup of the PRC entity will be required either before the acquisition or as part of the acquisition process

More questions:

What are the possible restrictions for transfers of equity interests to non-shareholders in a domestic company?  

Are the debts and liabilities always transferred to the transferee?  

……

To know more, download our legal handbook related to M&A in China…

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