Merger and Acquisition (M&A) under Iranian law

Merger and Acquisition (M&A) under Iranian law

In this article, we’ll take a closer look at merger and acquisition (M&A) in the business world. We’ll explore what makes it work, how it’s done, and how it affects a company’s finances. Also, we are going to examine certain potential challenges regarding M&A in Iran, such as grey debts, in-depth scrutiny of the company’s legal standing, investigating the genuine character of a company beyond its apparent title, reviewing unique licenses and certificates, and assessing the company’s scope of operation.

When two businesses combine, it is called a merger or acquisition (M&A). In a merger, both companies merge to create a new entity. In an acquisition, one company buys and integrates the other into its operations. The primary objective of M&A is to enhance efficiency and effectiveness compared to the original companies. This results in financial gains for both the original company owners and the new entity’s owners.

 

Benefits of engaging in merger and acquisition (M&A)

Companies are inclined to engage in M&A transactions for various reasons, with the key motivations being:

• Expanding their capabilities
• Obtaining a platform company
• Maximizing the use of existing assets
• Securing a strategic business position

Merger and acquisitions tend to be more successful when they serve a valuable purpose. Here are some advantages of using an M&A strategy:

Risk Reduction: Strategic mergers and acquisitions can reduce potential risks for businesses, especially smaller or local ones. Sharing the responsibilities of running a single company can alleviate some of the burdens. It also allows professionals from both companies to collaborate toward a common goal.

Better Financing: Acquisitions often make it easier to secure favorable financing rates compared to other types of purchases. Following an acquisition, companies can experience accelerated financial growth, leading to a more secure and straightforward financial situation.

Cost-Effective Growth: Acquiring another business can be more cost-effective than developing technology, expertise, or products from scratch. Using an M&A strategy in Iran, companies can access superior technologies, expertise, products, and resources.

Market Entry: Breaking into a new market can be a daunting task for new or even established businesses. While establishing a new branch is an option, mergers or acquisitions can save companies significant time, effort, and energy, enabling them to enter new markets in Iran more swiftly.

 

Various types and approaches to merger and acquisitions

Horizontal Acquisition: This type of merger and acquisition (M&A) occurs when one company buys another in the same line of business. It can involve competitors or non-competitors, depending on whether both companies serve the same customer base. The benefits of a horizontal M&A include the potential to expand a company’s customer base, increase market share, and reach new markets.

Vertical Acquisition: A vertical M&A happens when one company acquires another positioned differently in the supply chain. The acquiring company can be either higher or lower in the chain. Vertical acquisitions can create new revenue streams and cut costs by simplifying operations, as seen in the 2002 merger between eBay and PayPal.

Conglomerate Acquisition: In this type of M&A, a company purchases another company that operates in an unrelated industry or engages in unrelated activities. For example, a real estate company might acquire an insurance company. Diversification is the primary motivation for conglomerate acquisitions, providing stability to a company by offering multiple products or services.

Congeneric Acquisition: A congeneric M&A involves a company acquiring another that sells different products or services but targets the same customers. Such acquisitions help a company expand its market share and diversify its product lines.

 

Assessing an M&A Target in Iran

Financial Worth of the Target: The financial worth of a target refers to the overall value of a target company and its assets. In essence, it’s the price tag attached to the company. The financial worth of a target can either be lower or higher than what a buyer is willing to pay, and the buyer must determine if the purchase is financially sound.

Value of the Assets to the Buyer: This factor is somewhat subjective, as different buyers may place varying values on the assets in question. It’s a matter of how much the assets are worth to the specific buyer.

Potential Resale Value of the Target: This represents what a buyer believes they can fetch when they eventually resell the assets they’ve acquired. In simpler terms, it’s the estimated return on investment from reselling the acquired assets.

 

Addressing Challenges in Merger and Acquisition Transactions

Force majeure issues have introduced various complexities to M&A transactions. These challenges particularly affect the transaction’s terms, including pricing, representations, and warranties, which may be subject to scrutiny.

Every situation in M&A is unique and influenced by factors like the target company, buyer, financing, and the specific industry involved.

 

Contractual Mechanisms in M&A transactions

Currently, there are several contractual mechanisms designed to navigate these challenges. These mechanisms encompass Material Adverse Change (MAC) clauses, representations and warranties, hardship clauses, and potential adjustments to the sale price.

 

1. Material Adverse Change (MAC) Clause

The Material Adverse Change (MAC) clause is a legal mechanism that helps mitigate risks and uncertainties for both buyers and sellers during the period between signing the Merger Agreement and completing the deal.

MAC clauses specify the conditions under which a transaction can be terminated if a significant event adversely affects the target company’s situation. This clause benefits acquirers by offering an exit strategy based on predefined conditions. To avoid potential disputes, it’s advisable to draft this clause with precision. During the pandemic, the use of MAC clauses likely increased, and practitioners may directly reference epidemics or health risks in these clauses in the future. This clause serves as a crucial safeguard during the interim period between signing and closing.

 

2. Representations and Warranties

Negotiating seller representations and warranties for the buyer’s benefit can be challenging, especially when there’s a considerable time gap between signing and closing. Updating these guarantees during exceptional circumstances may become beneficial in the future.

 

3. Hardship Clause

A hardship clause allows for renegotiation if an economic or technological event significantly disrupts the contractual balance of services. Unlike the MAC clause, the hardship clause only enables renegotiation and necessitates parties to agree on the resulting consequences.

Many national legal frameworks provide for hardship clauses, such as Art. 1195 of the French Civil Code and Art. 3531 of the Polish Civil Code. It’s essential to clarify whether it applies solely to the seller, who typically bears cost-related risks, or also to the buyer, who may have an interest in maintaining a good relationship with the seller. A comprehensive list of events that trigger the clause should be included, and all scenarios should be formally documented to limit the judge’s discretion, whether the case is heard in state or arbitration courts.

 

4. Adjusting the Sale Price

Buyers may increasingly seek price adjustments based on objective criteria rather than fixed prices. In the absence of locked box mechanisms specifying a predetermined fixed price at signing, earn-out clauses might become more common. Legal practitioners will encounter opportunities to address new issues and safeguard the divergent interests of the parties in light of the current crisis.

 

Potential challenges of Merger and Acquisition (M&A) in Iran

1. Gray debts

Due to the lack of clear financial information for many Iranian companies, particularly small limited liability companies, these companies may have undisclosed short-term and long-term debts. Identifying these debts necessitates not only a review of the company’s financial records but also demands a comprehensive assessment carried out by legal and financial experts. These debts may encompass obligations to third parties, other companies, tax authorities, or social security organizations. In certain instances, company managers may secure loans and banking facilities in their names while using the company’s assets as collateral. Therefore, it is crucial to scrutinize the company’s deposits and guarantees, as new partners and shareholders may also become responsible for these potential debts following a transfer of shares.

 

2. In-depth scrutiny of the company’s legal standing

Gathering legal information about a company in Iran, including its history of lawsuits and any executive orders related to the company or individuals, can be a challenging task. Therefore, before engaging in any merger or acquisition (M&A) activities, it is imperative to engage a team of legal professionals to perform due diligence in this area.

 

3. Thoroughly investigating the genuine character of a company beyond its apparent title

Some Iranian commercial enterprises, though privately labeled, may have shareholders and board members with unique ties to governmental entities. Engaging with such companies necessitates scrutiny, taking into account various factors that should be assessed on an individual basis.

 

4. Reviewing unique licenses and certificates

In Iran, certain individuals or companies may receive particular licenses because of their special connections. Prior to engaging in M&A activities, it’s crucial to confirm the feasibility of renewing these licenses, which are essential for the company’s ongoing operations. This holds particular significance in specific sectors like tobacco, automotive, and those connected to pharmaceuticals and medical goods.

 

5. Thoroughly assessing the company’s scope of operations and its exclusion from specific activities

In Iran, certain commercial sectors, while not legally prohibited, have limitations that can complicate private sector involvement without foreign investment. For instance, this applies to industries like telecommunications or cryptocurrency production. It’s advisable to seek guidance from a proficient legal team specializing in foreign investment matters before proceeding with any M&A transactions.

 

Unlocking the Potential of M&A Strategies in Iran: Consulting for Success

Various merger and acquisition strategies in Iran offer diverse opportunities for companies. When considering your M&A strategy in Iran, seeking guidance from a law firm is crucial to gain valuable insights into the benefits and potential challenges. Pooya Yaghoobirad Law Firm, with its extensive experience in this domain, is a reliable choice for consultation. Don’t underestimate the significance of M&A strategies in Iran, as they can enhance your business and services significantly.

 

 

You can discuss your questions regarding Merger and Acquisition (M&A) with our experts in Iran Best Lawyer.