Acquisitions Flashcards
Financial Assistance under CA 2006
(s.677 - types of FA include loan, gaurantee, security, indemnity etc.)
Why a problem?
s.680 - a criminal offence!
- Applies to financial assistance granted after 1 October 2009
- but only applies to assistance given by PUBLIC companies
- so if question only has private companies only, say that not a problem.
S.678 - shares being bought in a public company
- public company cannot give FA for purchase of shares in itself
- subsidiary of that public company can’t five FS for acquisition of shares in the parent public company.
s. 679 - shares being bought in a private company
- a public company that is a subsidiary of a private company cannot give FA for the purchase of shares in its parent private company.
- (could advise for public company to re-register as a private company first)
Financial Assistance under CA1985
- Applies to financial assistance pre 1 October 2009
CA 1985 (ss. 151-158) prohibited BOTH PRIVATE COMPANIES AND PUBLIC COMPANIES from giving financial assistance for the acquistion of shares in themselves or of shares in their parent companies.
However, for PRIVATE COMPANIES only could use the WHITEWASH PROCEDURE.
- don’t need to go into specifics, just say ‘we need to find out more info to see if whitewash procedure was followed’
- Thus, it it’s historic financial assistance given by a PUBLIC company - couldn’t use whitewash procedure - so Buyer will be at risk:
- of civil consequences (security void and unenforceable and any loan outstanding becomes immediately repayable); and
- criminal aspect - reputation would devalue the investment Buyer is about to make.
- Downstream FA is okay under both Acts - i.e. a company giving FA for purchase of shares in its subsidiary.
Options when you discover a problem arising from due diligence
- Warranty
- Indemnity
- Negotiating a price reduction
- Inserting a condition precedent
- Remedy before contract (i.e. make seller sort it first, or speak to 3rd party such as supplier - seek written waiver that chance of control clause won’t be exercised - but may not be suitable if don’t want to publicise deal at this stage) - remember to say ‘undertake further enquiries!
- Defer consideration (payment)
- Accept and remedy after completion
- Restructure the deal - change to asset sale
- Withdraw from deal altogether
Standard of Disclosure: Case law
What’s to stop Seller from disclosing bundles of documents and hiding something in the mess?
Buyer should insist on ‘FAIR’ disclosure.
INFINITELAND
- Level / ‘standard’ of disclosure requires is whatever the parties have provided for in the SPA!
- Thus, if advising Buyer, have to actively make sure they insert ‘fair’ into the relevant provision.
What is ‘fair’?
NEW HEARTS
- fair means problems actually flagged up!
- can’t just refer to xomplex body of information
“It is hereby agreed and acknowledged by the parties that the Warranties . . . are given by the Vendor subject to matters fairly disclosed (with sufficient details to
identify the nature and scope of the matter disclosed)…”
DANIEL REEDS
- fair disclosure requires positive statements, rather than omissions
- if parties have provided for ‘fair’ disclosure, not for the buyer to work out what’s been omitted (E.G. here, seller disclosed list of existing licences it held - omitted from this list was a key licence it had recently lost - but how can Buyer know from this disclosure that it’s missing a key licence?)
- thus, Seller has to be positive
DISCLOSURE LETTER SHOULD BE DATED THE SAME DAY AS THE SPA!
What if Buyer has knowledge of something that Seller hasn’t disclosed?
Answer to his will depend on what SPA says.
INFINITELAND suggests that if the parties have agreed that the Buyer can’t sue, them Buyer can’t bring claim and vice cersa.
If contract is silent, then Buyer probably can sue.
But this may be counterintuitive - as the court will assume Buyer factored that knowledge in to the purchase price; so it hasn’t suffered any loss - court may penalise Buyer.
E.G.
“…the Buyer will not have any cause of action under warranties contained in this Agreement in respect of any matter or issue to the extent that the Buyer has actual, constructive or imputed knowledge of the facts or circumstances giving rise to such cause of action…”
- Buyer will obviously want to get rid of ‘imputed’ and maybe even ‘constructive’.
(Imputed means the knowledge of the Buyer’s agents)
Core Seller Protection Clauses
CAP ON LIABILITY (DE MAXIMUS)
- overall cap on all liability
- Buyer will want it to be 100% of the purchase price
- may be that each seller (if applicable) has an individual cap.
- if no cap, default position is unlimited liability
- Buyer might want NO CAP on claims under Tax Covenant (as potential for huge liabilities)
DE MINIMUS CLAIMS
- 2 elements:
- Individual cap - Buyer cannot bring any claim if less than certain amount (i.e. can’t even put it in basket!) - (normally £1,000 - £5000 depending on PP)
- Aggregate (basket) - All claims which surpass the individual cap will go into a basket; Buyer cannot bring claim until basket exceeds certain amount - (normally 1% of the purchase price)
- Buyer will want to be able to claim for whole amount in Basket, once cap surpassed; Seller will want to limit it only to excess over the cap - down to negotiation.
TIME LIMITS
- normally 2 years is fair (enough time for company to have gone through a financial year post-completion_
- however, should be 7 years for claims under the Tax Covenant - as HMRC has 6 years from the end of the Accounting Period within which the tax liability arose.
NO DOUBLE RECOVERY
- Buyer can’t claim twice for the same set of facts
- Otherwise, default position is that you could sue, although court would dount whether there’s been a loss
Other Seller Protection Clauses
MITIGATION
- Buyer should use best/reasonable endavours to mitigate loss which may give rise to a claim
- Could clarify exactly what’s required (i.e. above the common law duty to mitigate)
SUE SOMEONE ELSE FIRST
- If Buyer has right of recovery agaisnt insurer or another third party, sue them before selling Seller
PROPER NOTICE OF CLAIMS
- Buyer must give Seller notice of claims
- Claims withdrawn automatically if proceedings not issued and served within reasonable time from notice
CONDUCT OF CLAIMS
- if litigation brought against target co post-acquistion, Seller can control the conduct of the claim - to make sure its fought vigirously etc. (as Buyer won’t care because he’s getting an indemnity anyway!)
BUYER’S KNOWLEDGE CLAUSE
- see earlier entry
ENTIRE AGREEMENT CLAUSE
ALSO, SELLER CAN ALSO BE PROTECTED BY AMENDING WARRANTIES TO ENSYRE THEY ARE NOT TOO BROAD, VAGUE OR UNCERTAIN IN THEIR AMBIT, AND THAT THEY ONLY CONCERN MATTERS ACTUALLY WITHIN THE SELLER’S CONTROL.
Warning point
Seller protection clauses relate to CLAIMS AGAINST WARRANTIES ONLY
Indemnities are not capped - they are agreed reductions to the purchase price!
- i.e. for specified amounts in relation to specific, identified losses.
Approach to take if client informs you of problems post-completion of acquistion (in this order…)
(1) Is the problem covered by a relevant indemnity?
(2) Relevant warranty?
(3) If so, was it effectively qualified by disclosure? If not, claim in contract?
(4) If no warranty covering the problem, or if warranty was effectively qualified, any possiiblity of claiming in tort for misrepresentation? (unlikely, especially if misrep excluded by Entire Agreement Clause)
Ensuring funds available to meet a claim
(1) Retention / escrow account
- Buyer pays some of the purchase price into separate bank account (usually held in the joint names of the buyer’s and seller’s solicitors)
- Indemnity claims etc. are drawn from the amount in that account
- After a set period of time has expired, anythinf remaining in the account is paid to seller
(2) Deferred consideration
- where Buyer withholds part of the consideration - to be paid on future date or when agreed critera are met
- cost of breach of warranty n the intervening perod may be offsent against the deferred consideration payabe.
(3) Guarantee
- if seller is a subsidiary, parent company may guarantee obligations undertaken by the seller
- if seller individual shareholders, buyer may want to think about taking security over their personal assets or getting a third party guarantee
(4) Seller may take out warranty and indemnity insurance (such insurance also available for buyers these days).
Restrictive Covenants
Common to have restrictive covenants against seller:
- representing itself as owner of the same business;
- soliciting persons who were customers, suppliers, or employees of the business
- disclosing confidential information relating to the business.
- not to compete
HOWEVER, wll only be enforceable if they are limited to what is REASONABLE for the PROTECTION OF A LEGITIMATE INTEREST OF THE BUYER.
Restrictive covenants must be reasonable in:
- geographical scope
- business scope
- duration.
Buyer should extend the restrictions to other members of the Seller’s group, and maybe directors/employees of the Seller and/or Target.
