Tax advisory work in the context of Mergers and Acquisitions
19 August 2014
Posted by: Author: Stephen Zaaiman
Author: Stephen Zaaiman (Renmere)
It is difficult to define the
term ‘Mergers and Acquisitions’ or ‘M&A’ as an abstract concept. Whereas most commercially-minded
practitioners ‘know it when they see it’, it often seems that no single
definition quite succeeds in capturing the concept within four corners. This is particularly true in the field of tax
where it is not uncommon for the resident M&A practitioner to declare
jurisdictional authority over anything ranging from a residential lease
agreement to a capital allowance review.
However, as broadly inclusive as
the field may be, the core of M&A work comprises those commercially
negotiated acquisitions and disposals which fall within the broader
‘purchaser/seller’ paradigm. Typical
examples include competitive and negotiated purchases and sales of businesses,
shareholder interests, business combinations and mergers in their various
shapes and forms. Inseparable from these
transactions are transactions which facilitate or closely relate to these
arrangements such as acquisition funding, investment holding structures and
management incentive arrangements.
With the above in mind, it is
imperative that an M&A tax advisor develops a comprehensive set of skills in
relation to the ‘inner core’ of M&A transactions referred to above. In this regard, two distinct (but related)
disciplines form the foundation of every M&A tax advisory practice:
- the tax due diligence; and
- transaction structure advisory services.
The tax due diligence
In the South African context, tax
due diligence assignments will usually pertain to the acquisition of
The prudent third party purchaser
will, at the very least, require a detailed investigation of the legal,
financial and tax affairs of a target entity before entering into a purchase
and sale agreement for the acquisition of the shares. Failure to identify potential tax exposures
may result in the purchaser suffering an unanticipated diminution in the value
of its newly acquired investment.
The two major challenges which
confront a tax advisor in any due diligence assignment pertain to the
identification of and response to risk exposures of the target entity.
Whereas the identification of tax
exposures in the target entity can appear to be a reasonably straight-forward
task, the seller may often insist on strict limitations pertaining to the
review procedures. The seller will
typically insist on a limitation of the available time to complete the review
as well as the procedures which may be followed by the purchaser’s advisors. Various factors may impact the extent of these
limitations. For example, the seller may
be reluctant to expose the target’s management team to a protracted review
process for fear of disrupting the day-to-day operations of the business. As a consequence, the tax advisor is often left
with the challenging task of formulating a review scope and process which
balances the need for a thorough review on the one hand, with the need for
swift execution on the other.
Once the relevant exposures have
been identified, the tax advisor has to determine the appropriate course of
action in response to the relevant risks.
In this regard, it will be incumbent upon the purchaser to assess each
item to determine whether it constitutes a potential ‘deal-breaker’, whether it
impacts the purchase price, whether the general warranties in the sale and
purchase agreement will provide effective protection, whether it should obtain
an indemnity from the seller or whether some other protective measure may be
appropriate. The tax advisor’s role in
assisting with the formulation of the correct strategy in this regard is
It is imperative that the review
procedure remains dynamic to ensure that significant peripheral issues do not
go undetected as a result of a slavish reliance on scope limitations.
Once the due diligence phase is
concluded, the relevant terms of the Sale and Purchase Agreement (‘the SPA’) should
be reviewed by the tax advisor to ensure that the contractual protection
mechanisms are appropriate with reference to the tax risks identified during
the review. It is not unusual for the
tax advisor to be summoned to the negotiating table in order to debate the
relevance and impact of a particular tax concern in relation to the SPA.
Transaction structure advisory
Transaction structure advisory
work usually requires the tax advisor to abandon the relative safety of post mortem-type compliance reviews and
to venture into the dangerous realm of advising clients on their future
Whereas there are certainly
instances where it is best to assume a passive role as part of the transaction
structuring team, sophisticated M&A transactions often rely heavily on the
M&A tax advisor’s guidance for the development of the appropriate
transaction mechanism. In these instances, the tax advisor will perform an
important role, both in respect of the design of the transaction structure as
well as in respect of the facilitation of input by the commercial, legal and
other work streams.
In efficient transaction
structuring teams, there will typically be a high level of lateral competency
across the various disciplines and it will be incumbent upon the tax advisor to
develop a good understanding of the commercial, legal, financial, regulatory
and other parameters which may impact the transaction structure.
As is the case with the due
diligence review, transaction structuring work is usually performed under significant
time pressure and it pays to have a pragmatic approach during the initial
phases of the process. Given the fact that skilled resources tend to become a
scarce commodity within a busy transaction team, time is often better spent
developing solutions during the initial stages rather than issuing wordy
opinions on hypothetical issues.
However, overemphasising this approach runs the risk of progressing into
the later stages of the transaction with a technically flawed transaction
Tax advisory work in the context
of M&A transactions requires a strong tax technical basis, a good
understanding of M&A related legal and accounting principles as well as a commercially
Apart from the inherently dynamic
nature of transaction work, it should be born in mind that the annual tax
legislative amendments may introduce unanticipated challenges under a
prospective transaction. Significant
amendments were introduced over recent years to curb perceived abuses in the
context of M&A transactions and this remains an area of focus on the part
of SARS and National Treasury. To this end it is important to remain mindful of
underlying tax policies and trends.
This article first appeared on the August/September edition of Tax Talk.