Consequences when parties misdetermine the legal nature of M&A transactions

In corporate mergers and acquisitions (M&A) deals, investors often spend a lot of time answering the question of how much the business is worth. However, practice shows that an even more important question is often overlooked: what transaction are the parties actually entering into? When the commercial objective is not properly transformed into a legal structure, the risk is not only that a contract may be invalidated, but can also change the entire way the law applies to the deal. A recent cassation decision by the Supreme Court Judges Council is a clear demonstration of this issue.

When a business decides to acquire another business, the negotiation usually begins with the question: how much is the target company worth?

Price has never been the most important question of an M&A deal

When a business decides to acquire another business, the negotiation usually begins with the question: how much is the target company worth?

This is completely understandable. The transfer price determines the investment efficiency, the ability to recover capital and the expected profitability after the transaction. Therefore, the parties are willing to spend many months performing financial due diligence, evaluating business activities, analyzing the market and negotiating each price term.

But experience from many M&A disputes shows that price is not always the cause of a failed deal. Many transactions break down not because the parties misvalue the business, but because they have not determined the legal nature of the transaction they are making in the first place.

Because if the transfer price is determined incorrectly, the parties can still continue to negotiate. But if the legal structure of the transaction is designed on an incorrect premise, the entire deal may have to be reviewed from the beginning when a dispute arises.

M&A is a commercial objective, not a legal transaction

What businesses call "buying a company" or "buying a business" actually only reflects  the business goal of the transaction: gaining control of a business.

Meanwhile, the law does not regulate this goal as an independent legal relationship. To achieve the same commercial outcome, the parties can choose from many different legal structures.

If the investor buys the entire contributed capital of a limited liability company, the transaction is mainly governed by the Law on Enterprises.

If buying shares of a joint-stock company, the object of transfer is the ownership of the shares.

If only the transfer of factories, production lines or part of business activities is accepted, the transaction may have the nature of an asset purchase and sale contract or the transfer of assets associated with business activities.

In many other cases, the acquisition of enterprises is also carried out through the transfer of investment projects, mergers and acquisitions of enterprises or the simultaneous combination of many different transactions.

From a business perspective, they all aim at the same goal: to buy control of the business. But from a legal perspective, these are completely different transactions. This is the point that many businesses unknowingly overlook.

The same commercial goal but can exist of many legal natures

One of the hallmarks of modern M&A is that commercial objectives and legal structures are not always uniform.

Investors do not buy a business just to own a legal entity. What they want is the right to control the business, the right to decide on business strategies, the right to exploit customer systems, assets, technology, and cash flow in the future. But the law does not regulate "control" as an independent asset. That right must be realized through a specific transaction structure.

Therefore, the same goal of "buying a business" can be expressed by many different legal methods. Each method entails its own regulations on the subject with the right to dispose, transfer conditions, implementation procedures, registration mechanism and legal consequences if the transaction is not carried out or disputed.

This means that the business objectives may be the same, but the legal nature of the transaction is completely different.

Wrong from the nature of the transaction will lead to wrong application of the law

How the legal relationship is determined will determine which legal norms are applied, which subjects have rights and obligations, which subjects need to be proven, and under what mechanism the legal consequences will be handled.

For M&A transactions, this requirement becomes even more important.

If the transaction is actually the transfer of contributed capital but is seen as a transaction of buying and selling assets, the application of the law will go in a completely different direction.

If the transaction is actually the transfer of control of the business but is considered as a contract for the purchase and sale of goods, the legal basis of the whole case may be misplaced from the beginning.

In other words, before answering the question "whether the contract is valid or not", it is necessary to correctly answer the question "what transaction is this".

The Cassation Decision No. 06/2025/KDTM-GDT[1] dated January 7, 2025 of the Council of Judges of the Supreme People's Court when settling a recent "company sale" transaction has re-raised the question that should have been answered from the beginning: what transaction did the parties actually establish?

According to the case file, the parties signed many different documents with the ultimate goal of transferring control of the enterprise. However, the process of resolving the case at the two levels of trial quickly shifted the focus to assessing whether the transaction was invalid or not and which party had to return the money received. The Council of Judges chose a different approach. Before considering the validity of the contract, the Court required to clarify the nature of the chain of transactions, determine the correct legal relationship in dispute, the right object to be transferred and the correct legal system that needs to be applied. Only on that basis can the validity of the transaction be accurately assessed and handle the legal consequences that arise.

Instead of dealing with the consequences of the transaction, the Panel of Judges requires that the transaction be properly identified first. In M&A disputes, this is a decisive distinction. A deal can only be properly resolved when it is first properly identified in terms of its legal nature.

This is also the reason why M&A disputes are often much more complex than ordinary commercial contract disputes.

Wrong from the nature of the transaction will lead to the wrong way to resolve the entire dispute

In M&A activities, the legal nature of the transaction does not only determine which law the transaction is governed by. More importantly, it determines the entire "legal architecture" of the deal.

If the nature of the transaction is misdetermined, the deviation will not stop at the wrong application of some laws. The deviation will spread to the entire dispute resolution process. From the fact that the legal relationship may be incorrectly defined; The subject with rights and obligations may be misdefined; The person who needs to participate in the proceedings may be omitted; The object of proof also changes. Or even the mechanism for handling the consequences of the transaction when the deal is not continued can be completely different.

That is exactly what the Cassation Decision has indicated. The Council of Judges requires not only to redefine the legal relationship in dispute but also to clarify the nature of each payment, the purpose of each transaction and the relationship between the documents that the parties have signed. Only when all these factors are considered in a unified relationship can the rights and obligations of the parties be properly determined.

This reflects a very unique characteristic of M&A. Unlike many conventional commercial transactions, an M&A is rarely constituted by a single contract. It is usually a series of closely related documents: confidentiality agreements, memorandums of understanding, deposit agreements, contracts for the transfer of contributed capital or shares, post-transaction commitments, internal resolutions of the business, and many other documents.

If each document is considered separately without being placed in the overall transaction structure, it is easy to ignore the commercial goals that the parties are aiming for. This is also the reason why M&A disputes are often much more complex than ordinary commercial contract disputes.

In practice, many businesses invest a lot of resources in due diligence activities but spend too little time designing the legal structure of the deal. Meanwhile, it is the transaction structure that determines which objects are transferred, who is the subject with the right to dispose of, what rights and obligations are transferred to the buyer, as well as the handling mechanism if the transaction does not take place as planned.

A well-drafted contract cannot fix a misdesigned transaction structure. Conversely, when the legal structure reflects the commercial nature of the deal, the contract becomes a tool to recognize and protect the will of the parties, rather than being the source of the dispute.

Conclusion

The success of an M&A deal is not only measured by the value of the business or the ability to generate benefits after the merger. More importantly, it is determined by whether the parties have transformed the right business will into a suitable legal structure.

From that perspective, the Cassation Decision No. 06/2025/KDTM-GDT does not only resolve a specific dispute. This decision reiterates a principle that is valid for all M&A deals: before discussing the validity of the contract, it is necessary to determine the true nature of the transaction. Because in M&A, a wrong clause can be corrected; but wrong from the very nature of the transaction, the whole deal may have to start from the beginning.