SINGAPORE Law and Practice Contributed by: Terence Quek, Benjamin Cheong, Hoon Chi Tern and Favian Tan, Rajah & Tann Singapore
4. Sale as a Liquidity Event (Sale of a Privately Held Venture Capital- Financed Company) 4.1 Liquidity Event: Sale Process While considerations for the type of sale pro- cess differ in each situation, bid processes are increasingly favoured for the sale of relatively large venture capital-financed companies – and this ostensibly helps with price discovery. There have also been several instances in which the business partners of targets, having worked with the founders and management team for a number of years, have initiated bilateral acquisi- tions. 4.2 Liquidity Event: Transaction Structure In a trade sale (as opposed to an IPO), it is more typical for the existing venture capital investors to make a clean exit. As trade sales are typically entered into by the buyer for strategic reasons, it is not common for other venture capital investors to remain as shareholders in a company that is the target of a trade sale. 4.3 Liquidity Event: Form of Consideration Most transactions are done on a cash basis. However, where the transaction involves the founders or management remaining in the tar- get company to work in a certain capacity, it is possible for these individuals to receive earn-out shares from the buyer as part of the purchase consideration – particularly when the buyer is a public or soon-to-be public company. 4.4 Liquidity Event: Certain Transaction Terms Founders are commonly expected to provide representations and warranties – and in certain
cases indemnities – to a buyer. Although the use of an escrow holdback depends on the particular risks identified by the buyer during the course of its due diligence, this is not generally seen in Singapore transactions because most ven- ture capital investors would want a clean exit. (Indeed, most would need a clean exit, in order to wind up the fund and provide returns to their limited partners (LPs)) Warranty and indemnity insurance (more com- monly known as “W&I insurance”) is increas- ingly popular in Singapore, especially for larger transactions involving private equity and venture capital investors who want to ensure a clean exit from their investment with little or no residual liability. In the current economic climate, and where there is a price valuation gap between the buyer and founders looking to exit, earn-out mechanisms are also on the rise in order to bridge the valu- ation gap. Spin-offs involving the sale of assets or the sale of shares of a subsidiary company are possible. The usual considerations in relation to an asset sale apply, thereby allowing the buyer to choose the assets it acquires and leave the rest of the assets and liabilities with the seller. Tax and reg- ulatory considerations on the part of both the seller and buyer are also relevant when parties are structuring the transaction. Sale of Shares Generally, the sale of shares is a more straight- forward process, which enables a buyer to take 5. Spin-Offs 5.1 Trends: Spin-Offs Spin-Offs
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