Acquisitions Flashcards
SHARE PURCHASE AGREEMENT - provisions B wants
CONTRACTUAL PROTECTION
- caveat emptor (BB)
- little protection in cL
How?
- warranties
- indemnities
- retention account
- conditions precedent
SHARE PURCHASE AGREEMENT - provisions S wants
CONTRACTUAL PROTECTION
- wants clean break
- doesn’t want to be liable for things after (or for too long/much)
How?
- Disclosure letter
- vendor protection clauses
- seller limitation clause (time and amount of money)
worried S won’t meet certain claims
WHAT TO PUT IN SPA?
Advice proceeds are placed in Retention Account for some time to meet warrant claims
lots of liabilities
WHAT TO PUT IN SPA?
reduce purchase price
regulatory approvals required?
WHAT TO PUT IN SPA?
make it condition precedent of SPA that it is obtained
licenses about to expire
WHAT TO PUT IN SPA?
make sure they are renwed
what are warranties?
A contractual statement of fact that S makes –> regarding specific aspects of the Target
E.g. ‘Target is not a party to any litigation’
Usually in a schedule and brought into the body of SPA via a clause
areas where warranties given
- accounts
- employees
- IP
- Real estate
- contracts
- trading arrangements
- disputes
- taxation
warranties purpose
Offers contractual protection (B can sue for breach of warranty (damages) if warranty untrue
- seller will not want to be in breach of warranty
- warranty forces S to make appropriate checks and inform B (via disclosure) during negotiation of SPA
warranties - how to protect seller?
DISCLOSURE LETTERS GIVES S CONTRACTUAL PROTECTION
- S gives warranties (statements of fact) BUT if S knows a fact that puts them in breach of a particular warranty, it can ‘disclose’ this to buyer in DL
- Seller cannot be sued for breach of a particular warranty in relation to that particular fact
- S’s liability for breach of warranty claims = usually limited by the vendor protection provisions and the contents of the disclosure letter
indemnities - what is it?
S promises to reimburse B in relation to a specific liability for any loss it suffers (e.g. any costs that may arise due to litigation)
purpose of indemnities
allows B to confidently buy the Target
indemnities - protecting seller
Vendor protection provisions (TIME LIMIT + FINANCIAL LIMIT) = contractual protection
- limits S’s liabilities for breach of warranty claims
- time period (off hook after X time)
- financial limit (on amount B can claim - usually limited to purchase price)
- may include procedure that must be followed by B to bring claim (e.g. time limits for notifications of claims)
three ways to purchase a business of a comp limited by shares
- asset sale/business sale (acquiring business of comp as a going concern)
- share sale (acquiring all of the shares in the company)
- sale of assets (particular assets you require)
SHARE SALE
B –> purchases ISSUED SHARE CAPITAL of the company (shares transferred by STF)
S –> the selling shareholders
Target comp –> continues to trade as it did before but with new owner
Result:
- liability/assets NOT transferred to B (remains with Target)
- BUT liability will be a concern of B (they affect value of Target which belongs to B)
what if B doesn’t buy all of the issued shares?
Target won’t be wholly owned by B
- issues arise in running of comp due to minority SH
- more common for all issued shares to be purchased
ASSET SALE - what does B purchase?
B purchases WHOLE of business as GOING CONCERN or distinct trading division
- business able to trade after completion of purchase as it did before
- transfer each asset separately
- TR1 for prop, IP must be assigned/licensed, contracts assigned/novated, employees transfer automatically (TUPE)
- B CAN CHERRY PICK (leave behind creditors, tax liabilities, litigation)
who is the seller in an asset sale?
THE SELLING COMPANY/Partnership/Sole Trade
- ownership of comp does not change but businesses being sold does change hands
- selling comp continues (as a cash shell if whole of business is sold)
who is consideration paid to in an ASSET SALE
Selling comp, partnership, sole trader
If company
- selling company needs to declare a dividend or be wound up by its shareholders
who is consideration paid to in an SHARE SALE
Straight to shareholders (better for tax reasons)
warranties/indemnities in an asset sale?
Yes (not as important as in SS because can leave behind liabilities)
AND additional contractual protection for B to ensure it can recover monies owed from S –> Retention Account
warranties/indemnities in an share sale
Yes (take everything incl. hidden liabilities)
AND additional contractual protection for B to ensure it can recover monies owed from S –> Retention Account
employees in asset sale?
transfer automatically to B (TUPE)
Employees in share sale?
still employed by same employer
contracts in asset sale?
remain with S unless assigned/novated to B
contracts in a share sale?
check for change of ownership clauses
- alert them?
premises in asset sale
Must be transferred to Buyer (TR1)
DOESN’T automatically change to B’s ownership
Buyer can choose assets it wants to acquire from the Target to allow it to continue as a ‘going concern’ – e.g. IP, vehicles, goodwill, machinery, offices, stocks
premises in share sale
B becomes owner (Premises still belongs to the Company)
T’s liabilities in asset sale
Remains with seller as shell company
T’s liabilities in share sale
Remains with Target
Who prefers share sale? Why?
SELLER
- clean break from business (esp. if current owners are retiring individuals)
- significant tax exemptions (for corporate seller on share sale)
- consideration goes straight to SH
Disadvantages of share sale for SELLER
not many on the whole
BUT
- B may still negotiate certain warranties and indemnities from selling shareholders (not perfect clean break)
advantages of share sale for BUYER
- STRAIGHT FORWARD (only need to transfer shares rather than transferring each asset comp requires to run business)
- QUICKER NEGOTIATION
- CONTINUITY (less disruption to business and to outside world looks like no change in business at all; ownership of prop same, employer same)
- SIGNIFICANT TAX ADVANTAGES (SD on shares may be lower than SDLT on asset sale)
- NO NEED TO OBTAIN 3P CONSENTS (for contracts - customers, suppliers, LL, others)
disadvantages of SHARE SALE to buyer
- more time/costs spend on due diligence (B acquires target with all its liabilities)
- more negotiation (warranties and indemnities to protect B)
- B acquires target with all its liabilities and any problems
Who prefers business/asset sale and why?
BUYER
- B decides what assets and/or liabilities it wants to purchase and what assets it wants to leave behind (good if T has lots of liabilities, cherry picking)
- tax advantages (depending on nature of assets B is acquiring)
Business/asset sale - DISADVANTAGES to Buyer
- more negotiation of exactly what assets and liabilities are going to be purchased
- each asset must be transferred separately (complex, docs, time and admin costs)
- disruption of continuity of business
- 3P consents likely to be required (assignments and novation) alerting other parties to the sale (causing uncertainty and disruption)
BUSINESS/ASSET SALE - SELLER’S ADVANTAGES
If Seller wants to retain profitable parts of business but sell loss making or non-core division
S has freedom to sell only part of its business in an asset sale
BUSINESS/ASSET SALE - SELLER’S DISADVANTAGES
- NO CLEAN BREAK (can’t transfer assets/liabilities to B unless B wants them)
- consideration goes to selling company so money must be passed onto SH by dividend/winding up of shell comp after sale
steps for acquisition (transaction structure)
- CONFIDENTIALITY AGREEMENT (both sides)
- Heads of term/agreement
- due diligence
- acquisition agreement . (consideration, warranties, indemnities, vendor/seller protection provisions, agreement for completion, details of issues at completion)
- disclosure letter addressed to B from S
- completion documents
CONFIDENTIALITY AGREEMENT
S gives sensitive info to B so S asks for confidentiality agreement
- usually continues indefinitely unless private equity house is involved (then seen subject to time limit of 2-3 years)
- B asks for mutual confidentiality undertaking from S usually
AQ. AGREEMENT: CONSIDERATION
- how much will B pay
- what form of consideration (cash, shares, loan notes),
- when paid
- how consideration apportioned between assets required (on asset sale
AQ. AGREEMENT: AGREEMENT FOR COMPLETION
- same time as exchange?
- conditions precedents? (if yes = time gap)
AQ. AGREEMENT: ISSUES TO BE DEALT WITH AT COMPLETION
- completion BM of B, S, T
- what needs to be executed (e.g. STF)
disclosure letter - what is it?
Limits S’s liability for breach of warranty by qualifying warranties
- sets out details of any matters which make statement of fact given in warranties untrue
- two types of disclosure:
FRONT END: GENERAL DISCLOSURE - refers to searches of public reg that B should do prior to completion (e.g. CH/LR)
- S seeks to ensure anything B could find in these searches are deemed disclosed
- B seeks to resist this and make it narrow
BACK END: SPECIFIC DISCLOSURES
COMPLETION DOCUMENTS
SERVICE AGREEMENTS for directors/managers of Target (for those staying or brought in)
TAX DEEDS (usually a schedule in SPA now) - indemnity from S to B re: tax issues (share sales)
NOVATION/ASSIGNMENT AGREEMENTS – for transfer of 3P contracts (asset sales)
COMPLETION BOARD MINUTES (T, S, and B)
STATUTORY FORMS – e.g. to notify CH of change to T’s registered office, auditors, and directors
TRANSITIONAL SERVICES AGREEMENT – if T being provided with key operational services (e.g. HR/accounting/IT) by parent or sister company prior to completion, B may need those services to continue for a short period after completion (ensure no problems with continuity of trading after completion and to allow T to find alternative supply for services)
WHO IS LIABLE UNDER WARRANTIES? (can be more than 1 warrantor as there can be more than 1 seller)
B usually insists all sellers give warranties on joint and several basis (sue all or any for full amount and leave them to apportionment between themselves)
if several - must bring proceedings against individual sellers
if joint - similar to joint and several but death of a party jointly liable releases his estate from liability (must issue proceedings against all joint parties)
Civil Liability (Contribution) Act 1978
splitting the bill
Entitles joint warrantor who is found liable to pay damages for breach of warranty to seek contribution from the others liable for the same damage
Court will evaluate amount each party should pay to sued seller based on what court consider just and equitable having regard to each party’s responsibility for damage in Q
express contribution agreement (splitting the bill - warranties)
Sellers won’t want court to decide amount they should each contribution
Common for sellers to agree ‘Contribution Agreement’ to which they will refer should successful warranty claim be made
E.g. minority SH (who does not have much involvement in running company) to have low cap set on any contribution he may have to pay
This agreement doesn’t affect B’s right to choose who to pursue for a claim
completion if exchange and completion are simultaneous
B and S (and their representatives) will meet to complete the transaction
All acquisition documentation signed
All relevant completion board meetings
Usual for last minute negotiations to take place at completion meeting
exchange and completion not at same time
Completion meeting = formality only
No last minute negotiations
post completion (BUYER)
deal with integration of new business into existing business (if it has one)
post completion (B’S LAWYER)
statutory filings
update statutory books
pay stamp taxes
‘Bible’ of copies of executed completion docs
Customary for either B or S’s lawyers to put together a ‘bible’ of copies of the executed completion documents
Every party will receive a copy of the bible
Used by parties to remind them of terms of the transaction when necessary in the future
stages of acquisition by private treaty (1 buyer)
- take instructions
- agree heads of terms
- DD1
- acquisition agreement
- disclosure letter (S)
- exchange
- consents, conditions
- completion
heads of terms - what are they
set out the KEY TERMS of the transaction as agreed between the parties in principle
set out KEY STEPS parties have agreed they will/will not take during negotiations
PURPOSE OF HEADS OF TERMS
- AVOID misunderstanding, wasted time, costs, for both parties
- ensures parties have same goal in mind
- give parties structured basis for negotiating main contract
- acts as road map of steps that need to be taken before formal agreement is signed
- starting point for parties’ advisors
HOT . - legally binding?
GENERALLY: NOT legally binding (but might contain some binding provisions)
non-binding parts carry MORAL FORCE (confirm serious intent and commitment on part of both parties to observe terms agreed)
- parties can proceed with confidence
- can limit flexibility with later negotiations
legally binding provisions in HOT - HOW?
For it to have contractual force, must follow usual contractural rules of consideration, execution
and expressly state it is legally binding
common binding parts of HOT
EXCLUSIVITY CLAUSE
- protects B against wasted time and cost (DD investigation + negotiation)
- prevents S negotiating with other parties for a fixed period
- gives B confidence in proceeding (won’t lose out to rival bidder)
(NB. this is a ‘lock out’ provision which is enforceable if sufficiently certain a ‘lock in’ one is not )
when is HOT agreed?
beginning of the transaction once parties have agreed preliminary terms but before definitive agreements have been drafted
- before significant costs incurred
- sometimes agreed before lawyers are instructed by parties
which HOT provisions will be in SPA?
Provisions setting out terms of deal itself
which HOT provisions will not be in SPA?
Provisions re: things that will already have happened by time of exchange
Provisions that set up steps parties will/will not take during negotiations
because: by the time SPA is signed they will already have been dealt with
purpose of DD
FACT FINDING MISSION
- B is subject to caveat emptor (buyer beware)
- B’s responsibility to ensure it obtains all information relating to company/business
- DD provides B with as much info for B
- allows B to make informed choice about whether to purchase, what contractual provisions/protections are required
exent of DD
DEPENDS ON CIRCUMSTANCES
factors:
- structure of sale (share or asset, if share, more DD because all problems/liabilities are being purchased)
- amount of consideration
- client instructions
- types of assts being purchased
proceure for DD
- B’s solicitor prepares and sends DD questionnaire (doc setting out different areas about which B requires info)
- Seller and its solicitor reviews it and prepares response (either answer Qs one by one, or refer B to docs for B’s solicitors to work out, or combo of 2)
- B may have further questions as a result of response
- DD reports prepared for B (usually more than 1 type of DD report - financial, legal, environmental, IT, property)
- DD report and implications help inform B’s next steps (reduce price, contractual warranties, indemnities?)
what will DD questionnaire contain Qs about
- Target’s properties
- Main contracts/trading
- Tax issues & Finance
- Employees
- Corporate
- IP
- Licenses/Consents
- Litigation/Disputes
DD reports - types
FULL FORM(setting out comprehensive information about all aspects of the target and its business) or
Prepared on an “exceptions only” basis (i.e. focusing only on issues which are material and problematic)
In addition, the client may request an oral report
types of DD Qs for IP
- Please provide details of all trade marks, service marks, and registered designed owned or used by the Target and details of all registrations
- Please provide details of all copyrights, unregistered designs, databases, and industrial drawings owned or used by the Target
types of DD Qs for property
- Please provide the details of all properties held by the Target.
- Please provide details of any leases leased out by the Target as a landlord.
types of DD Qs for lit
- Are there any disputes or litigation ongoing?
2. Are there any disputes or litigation threatened?
types of DD Qs for finance
- Please provide details of the Target’s bankers.
2. Please provide details of any debt owed by the Target.
types of DD Qs for employees
- Please provide the employment contracts or memorandum setting out the terms of the directors and senior employees of the Target
- Please provide details of employees of the Target.
types of DD Qs for contracts
- Please provide details of any on-going contracts.
2. Please provide contact details of the parties which the Target company is currently contracting with.
how to value non-listed company
- Book value (balance sheet value of assets or break up value) - doesn’t reflect true value
- GOING CONCERN - rather than broken up and sold (depends on how comp is performing and future prospects)
- FUTURE CASH FLOW (purchaser is buying future stream of income generated by profits, value comp by taking a number of years’ multiple of future profits) - equate with return investor receives over time
