What is Equity Acquisition?

Equity acquisition refers to a transaction where the acquirer purchases all or part of the equity held by the shareholders of the target company to gain control over the acquired business. The parties involved are the acquirer and the target company's shareholders—in essence, equity acquisition means "buying a company." The nature of the transaction is the transfer of equity in the target company, while the company's assets remain unchanged, generally not affecting its operations or production. Through the acquisition, the buyer becomes a shareholder of the target company, obtaining shareholder rights such as dividend rights and voting rights. Therefore, the acquirer may pay closer attention to the company's operational status and growth prospects.

After the acquisition, the buyer assumes the target company's rights, obligations, assets, and liabilities proportionally based on their shareholding. Equity acquisition carries significant risks for the acquirer, including disputes over ownership, sustainability of operations, discrepancies between actual and book assets, compliance risks, labor issues, hidden liabilities, and post-acquisition integration challenges. Thus, thorough due diligence on the target company is essential. Typically, a professional team comprising financial advisors, appraisers, and lawyers is engaged to study feasibility, negotiate terms, and plan integration to ensure a smooth transaction.

Key Considerations in Equity Acquisition:

Equity acquisition allows the buyer to quickly access unique resources—such as technology and talent—that cannot be developed internally. It also creates synergies in R&D, procurement, production, sales management, and corporate culture, reducing costs and enhancing profitability.

During an equity acquisition, the buyer should:

1. Conduct a detailed review of the target's ownership structure, including business licenses, tax certificates, active contracts, articles of association, and board/shareholder resolutions.  

2. Assess the target's assets, verifying ownership documentation for non-monetary assets like land use rights, real estate, and patents.  

3. Scrutinize the target's external liabilities, as their existence and amount directly impact post-acquisition operations and profitability. Sellers should explicitly warrant liability amounts and agree to breach penalties.  

4. Audit all ongoing contracts, especially guarantees or sureties that may trigger contingent liabilities. The purchase agreement should stipulate that undisclosed liabilities remain the seller's responsibility.  

5. Confirm whether the seller has fully paid their subscribed capital and whether the transferred shares are encumbered—e.g., frozen by courts or pledged as collateral.