Merger, share purchase or asset purchase: how to choose the structure of an acquisition

In a share purchase (or a purchase of partnership rights, in a sociedad de responsabilidad limitada, a limited liability company) the object of the operation is the ownership interest in the company, and the company does not change. It keeps its assets, contracts, permits, employees and all its liabilities, declared or not. In an SpA, the share transfer must record that the transferee knows the legal rules of that company type, the bylaws and the protections that do or do not exist in them for shareholders; the omission does not invalidate the transfer, but it makes the transferor liable for damages (Article 446 of the Código de Comercio, the Commercial Code). In a limitada, a partner may not assign its interest without the prior authorization of all partners; an assignment without it is void (Article 404 No. 3 of the Commercial Code, applicable through Article 4, second paragraph, of Law 3.918). If the company is a publicly held sociedad anónima and the purchase allows taking control of it, it is carried out through a tender offer, save for the exceptions in the same article (Article 199 of Law 18.045).

In an asset purchase the buyer acquires specific assets and the liabilities it expressly agrees to assume, plus those the law makes follow the business. The selling company continues to exist with whatever it did not sell. Each asset is transferred by its own means, and contracts do not transfer on their own: unless the contract allows assignment, the counterparty must consent. Permits and authorizations are reviewed one by one.

Three liabilities may follow the business regardless of the contract. The first is employment relationships: if what is transferred is the business or a unit of it, the contracts keep their force and continuity with the new employer (Article 4, second paragraph, of the Código del Trabajo, the Labor Code). The second is the seller's taxes relating to what was acquired: if the seller ceases its activities because of the sale, the acquirer becomes guarantor of them (Article 71 of the Código Tributario, the Tax Code). The third is the penalty of a selling legal entity that is criminally liable: the fine and the forfeiture of sums may be enforced against the acquirer, up to the value of what was acquired, if the seller's assets are insufficient and the acquirer could foresee the conviction (Article 18 bis of Law 20.393). If the sale covers most of the assets, with substantial continuity of the material and human means and of the activity, the penalties follow the acquirer under the rules provided for mergers (Article 18, final paragraph, of the same law). See is criminal liability inherited?.

A merger is the union of two or more companies into a single one, which succeeds them in all their rights and obligations and into which the entire estate and the shareholders of the merged companies are incorporated. It is a merger by creation when the companies that dissolve contribute their assets and liabilities to a new one, and a merger by incorporation when an existing company absorbs the others; in no case are the merged companies liquidated. The shareholders meeting approves the audited balance sheets and the expert reports that apply, and the board of the resulting company distributes the new shares among the shareholders of the merged companies in the corresponding proportion (Article 99 of Law 18.046). Nobody stops being a shareholder without consenting to it (Article 100). The SpA follows these rules where its bylaws and the special rules of the Commercial Code are silent, insofar as they do not conflict with its nature (Article 424 of the Commercial Code).

• Buy the shares when the value lies in the company as it operates today: contracts, permits, customer history and a workforce you do not want to move, provided the company's history is verifiable and covered by warranties. The buyer takes the company's liabilities as part of the deal and puts them in the price.
• Buy the assets when you want a line of business or a plant and not the whole company, when the seller's liabilities are large or cannot be measured, or when the selling company itself carries problems you do not want to inherit. Accept in exchange the work of transferring each asset and contract, and the employment, tax and criminal rules that in certain cases follow the business.
• Merge when the goal is to integrate two companies under the same owners, or when the sellers want to stay on as shareholders of the combined business instead of receiving cash. Accept the universal succession of all liabilities and, if it is a sociedad anónima, the two-thirds approvals with withdrawal right and the audited balance sheets and expert reports that apply.

The share purchase and the merger are often combined: the buyer acquires the shares and, once the liabilities are known and reflected in the price, merges the acquired company with its own. The order matters. When the buyer gathers all the shares of a sociedad anónima, the company dissolves if more than ten days pass (Article 103 No. 2 of Law 18.046), and the Income Tax Law treats that gathering as a merger: the difference between what was paid for the shares and the equity of the absorbed company is allocated, first, among its non-monetary assets, under the rules of its Articles 15 and 31 No. 9. That later merger is a reorganization, with its own tax and corporate requirements.

When the companies are not yet yours, the structure decision is taken with the findings of the prior legal review (due diligence) in view: what the review discovers about liabilities, contracts and permits is what moves an operation from shares to assets, or the other way round. If the buyer acquires only part of the company, the relationship with the owners who stay is governed by the shareholders agreement. And on any of the three routes, a concentration operation between companies that do not belong to the same business group, with effects in Chile and reaching the thresholds in force, is notified to the Fiscalía Nacional Económica (the competition authority) before it is completed (Articles 47 and 48 of DL 211); the thresholds and the procedure are on the DL 211 page.