The term debt-assumed acquisition refers to an arrangement in which the acquirer assumes the liabilities/debts of the target company instead of paying all consideration to the original shareholders (transferor). The following recommendations are given on how to prevent legal risks in such transactions, in various situations according to different motives of the parties.
SITUATION I
When a company runs into financial troubles, its shareholders may transfer part or the majority of their shares to strategic investors, in the hope of saving the company. Under a situation where the acquirer lacks confidence in the target company’s debts, which have little transparency,
in order to minimize acquisition risks, the parties would agree that the acquirer assumes the debts of the target company and pays the remainder of the consideration to the transferor after paying off all the debts. Such an arrangement would put the transferor at risk that the acquirer may overstate the amount of debts and refuse to pay the rest of the consideration after gaining control of the target company.
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Xu Defeng is an arbitrator with Beijing Arbitration Commission/Beijing International Arbitration Centre, and a professor at the Law School of Peking University
