Asset sales Flashcards
1
Q
- An asset sale will contain the following provisions:
A
- Recitals
- Interpretation
- Shares to be sold
- Price
- Completion accounts*
- Conditions precedent*
- Completion arrangements
- Restrictive covenants
- Warranties
- Includes limited tax warranties e.g. in relation to the VAT position of the business and PAYE compliance
- Indemnities
- Not including tax indemnities
- Seller protections
- Boilerplate clauses
- Further provisions in consequences of the way in which the transaction is structured.
- Drafted for a simultaneous signing and completion but there may be reasns for why parties do not want this
2
Q
- Third party contracts - assignment
A
- A contract has both a benefit and a burden. For example, in a distribution agreement, the seller produces goods which are then passed to the third party for distribution around a relevant market. The benefit for the seller is receiving a price for the goods passed on but the corresponding burden is to produce and make the goods which are to be distributed.
- If the buyer wants to take on the distribution arrangements, the seller may be able to assign the benefit of the contracts to the buyer but in law the burden cannot be assigned. Every contract must be examined as part of the due diligence process to see if it can be assigned or whether any clauses prevent this. There may be an outright prohibition on assignment or assignment may only be permitted with the prior consent of the third party
- Easier because you don’t need to ask third party for consents but there need to be rights to assign
3
Q
- Third party contracts – Novation and negotiation of a fresh contract
A
- Novation
- If the seller wants to be released from outstanding obligations, it may be possible for the contract to be novated. This means that the other contracting party will release the seller from the contract and allow the buyer to take over the benefit and the burden of the contract (effectively the buyer steps into the seller’s shoes and becomes a party to the original contract in place of the seller).
- Novation will always require the consent of the third party and is often used for key contracts or unassignable contracts.
- Negotiation of a fresh contract
- If the third party does not agree to novation and assignment is either not permitted under the contract or is not commercially acceptable as the seller wants to pass both the benefit and burden of the contract to the buyer, then the buyer may want to try and negotiate a fresh contract with the third party.
- This gives the buyer scope to negotiate new terms and conditions if the current ones are commercially unacceptable. The terms of any fresh contract will, of course, depend on the relative bargaining power of the buyer and also the third party.
- However, negotiating a fresh contract will raise issues of confidentiality and timing.
4
Q
- Timing and confidentiality: Conditions precedent
A
- Whenever a third party is to be approached, either for permission to assign or novate or with a view to negotiating a fresh contract, the buyer and seller will have to consider the timing of the approach very carefully in the light of confidentiality undertakings that have been given and the damage that could be done to the business if news of the proposed sale were to leak out.
- The method of any approach to a third party is usually agreed by the seller and buyer before an approach is made. The parties should take care to avoid placing themselves in a disadvantageous negotiating position with the third party. For example, if a deal is announced which is conditional on a new third party contract, this could give the third party a very strong bargaining position.
- In some cases, it will therefore be appropriate to delay contacting the third party until all the other terms of the transaction have been agreed. If a contract is very important to the target business, the seller and buyer may agree to sign the acquisition agreement but make the satisfactory assignment or novation of the contract or the satisfactory conclusion of a fresh contract with the third party a condition precedent to completion.
- The parties will therefore be contractually bound to proceed with the transaction unless the assignment, novation or negotiation of a fresh contract is not obtained.
5
Q
- Timing and confidentiality – low value contracts
A
- For low value or less important contracts, the parties may not want to wait to obtain consent to assign or novate these contracts before they go ahead and complete. Completion is unlikely to be conditional on (and therefore signing and completion will not be split purely because of) assignment or novation of these lower value or less important contracts. On completion of the acquisition such contracts will often still legally remain with the seller and the parties will agree to have them assigned or novated as soon as possible after completion.
- With the lower value and less important contracts, novation is often effected by conduct. For example, if after completion the third party accepts performance by the buyer under the contract and pays for goods or services which the buyer provides, it can often be said that the contract has been novated by the conduct of the buyer and the third party.
6
Q
- Methods of transfer of UK assets typically included in an asset sale
A
· Premises - by deed, TR1
· Fixed plant and equipment - title will transfer with the premises
· Loose plant and equipment - title will pass by delivery
· Raw materials - title will transfer by delivery
· Work in progress - title will pass by delivery
· Stock - title will pass by delivery
· Vehicles - registration of anew registered keeper at DVLA
· Existing contract with customers and suppliers - assignment or novation
· Books and records - title will pass by delivery
· Intellectual property - assignment (and registration if applicable)
· Goodwill - title will pass in accordance with the acquisition agreement or there may be a separate deed of assignment
· IT systems - hardware will pass by delivery and software by assignment
· Employees - contracts of relevant employees will automatically transfer under TUPE
· Debtors - assignment
· Shares in UK subsidiary - stock transfer form
7
Q
- How do you assess whether an employee is ‘assigned’ to the business being transferred?
A
- Where only part of a business is being transferred, or where employees work in more than one business operated by a company, employees will not transfer to a buyer if they are not ‘assigned’ to the business or part business transferred.
- The court will look at an employee’s function rather than the terms of their employment contract to determine whether employees are wholly engaged or assigned to the business (Botzen v Rotterdamsche Droogdok Maatschappij [1986] 2 CMLR 50).
- The Employment Appeal Tribunal has set out further guidance in the Duncan Webb case – Duncan Webb Offset (Maidstone) Ltd v Cooper & Others [1995] IRLR 633. In determining the question of whether an employee is ‘assigned’ to the business or part business transferred, tribunals should consider the following:
- the amount of time spent working in one part of the business over the other;
- the value given to each part of the business by the employee;
- contractual terms setting out what the employee’s job comprises; and
- the allocation of the cost for the employee’s services.
8
Q
- Can sellers dismiss employees before a transfer to prevent the automatic transfer principle applying?
A
- Employees only transfer if they are employed in the business being sold immediately before the transfer. However, if they would have been so employed if they had not been dismissed in certain circumstances prior to the transfer (Reg. 4(3)), the dismissal will be automatically unfair and liability for the dismissal will transfer.
- The circumstances that would lead to dismissals being deemed to be automatically unfair and liability for that dismissal transferring to the buyer are set out in Regulation 7(1) - which provides that if the sole or principal reason for an employee’s dismissal is the transfer itself, it is automatically unfair UNLESS the dismissal was for an economic, technical or organisational reason entailing a change in the workforce (‘ETO Reason’) (see Reg 7(2)). ETO Reasons could include (for example) a reduction in the requirement for employees carrying on a particular function in the business
- Whether or not the sole or principal reason for a dismissal is the transfer itself is a question of fact. Dismissals occurring shortly before or after completion of the sale are likely to be by reason of the transfer. It is important for these purposes to know when the transfer took effect.
- If the transfer is the reason for the dismissal, then either (1) there is no ETO Reason for it – in which case the dismissal is unfair and the liability for the dismissal transfers to the buyer under TUPE; or (2) there is an ETO Reason – in which case the dismissal is potentially fair (as a redundancy or a dismissal for another substantial reason) and liability will not transfer to the buyer.
9
Q
- What rights and liabilities do not transfer automatically?
A
- Under TUPE the buyer inherits the transferring employees on the terms and conditions which existed with the seller and with their continuous employment. The buyer also inherits all accrued rights and liabilities under or in connection with the employment contracts of the transferring employees: for example, an employee can sue the buyer for a breach of contract or acts of discrimination committed by the seller pre-transfer. This highlights the requirement for through due diligence.
- However, TUPE does not transfer:
- rights and liabilities under or in connection with a contract of employment that relate to an occupational pension scheme, and which relate to benefits for old age, invalidity or survivors Reg 10(1). However, an employer’s liability in respect of (i) contributions to a personal pension scheme, (ii) provision of life assurance benefits, (iii) certain enhanced early retirement/redundancy benefits under an occupational pension scheme will transfer, as these are not deemed to be old age benefits; or
- criminal liabilities.
10
Q
- Changes to terms and conditions - TUPE?
A
- Any changes to an employment contract at any time cannot be made unilaterally and must be agreed by the employee and employer. If a buyer unilaterally imposes changes to terms and conditions, the employees could resign and claim constructive dismissal.
- TUPE further restricts the changes which an employer may propose. A change to the employee’s terms and conditions is void (even if the employee purports to agree with it) if the sole or principal reason for the variation is the transfer.
- However, an employer may vary the employee’s contract if any of the following exceptions apply:
- the reason for the variation is not related to the transfer;
- the reason for the variation is an ETO Reason entailing changes in the workforce (which must involve a change in the numbers of functions of the employees) and the employer and employee agree the variation;
- the terms of the contract permit the employer to make the variation;
- potentially where the variation is entirely positive for the employee;
- there are ‘relevant insolvency proceedings’ and the specified statutory conditions are satisfied (NB: this condition is beyond the scope of the knowledge stream); or
- there is a collective agreement (these are agreements between employers and trade unions) from which the term or condition has been incorporated into the employment contract and certain conditions are met (NB: this condition is beyond the scope of the knowledge stream).
11
Q
- The parties to a business transfer cannot prevent TUPE applying but they can share the risks involved:
A
- Schedule of employees: Because of the uncertainty in determining which employees will transfer under TUPE and which will not, the parties will often agree a list of transferring employees. These are the employees which the parties think will transfer; they will not necessarily be the individuals who do actually transfer by operation of law under TUPE.
- Warranties: The buyer will carry out full due diligence of all transferring employees’ terms and conditions because it inherits those terms and conditions on a TUPE transfer. The seller will provide warranties that all of the information is correct and accurate and that no employment claims are threatened or pending.
- Indemnities: The parties will often give cross-indemnities, in order to apportion the risk of (1) liabilities which arise pre transfer and post transfer; and (2) certain employees who are not in the schedule of employees but who claim that they should transfer to the buyer under TUPE. The standard position is that the seller picks up the cost if an employee who is not on the schedule transfers by operation of law.
12
Q
- The duty to inform and consult
A
- Regulation 13 states that both the seller and buyer must provide information to, and in certain circumstances consult with, representatives of their own employees who may be affected by the transfer or by measures taken in connection with it (‘affected employees’).
- The BEIS Guidance lists the following examples of affected employees:
- employees who are to be transferred;
- employees of the transferor who are not being transferred to the transferee but whose jobs may be affected by the transfer; and
- employees of the transferee whose jobs may be affected by the transfer.
- Appropriate representatives may be:
- Representatives of a recognised trade union; or
- Elected employee representatives. (This could be an existing representative body with that remit or newly elected for this purpose).
- Where there is a recognised trade union, the employer must consult with those representatives rather than with any other employee representatives.
- Information must be given ‘long enough’ before the transfer to enable any consultation to take place – so this either requires the employees to be informed before the transaction (which may have confidentiality issues) or there will need to be a split signing and completion. The Seller will also need to consider the timing for carrying out any elections.
- Information to be provided must set out the fact of the transfer, when it is to take place, the reasons for it, the legal, economic and social implications for the affected employees and whether the seller and/or buyer envisage taking any ‘measures’ in relation to the employees (or if none, to state there are no measures intended). The buyer must inform the seller if there are any measures it is planning after completion, so that it can pass that information on to its affected employees.
- ‘Measures’ would most obviously include planned redundancies or changes to job location. However, even minor changes to an employee’s situation (for example, changing floors or using a different telephone system) are capable of amounting to ‘measures’ which could require consultation.
- Consultation is only required if ‘measures’ are planned in relation to a party’s own affected employees. Therefore, transferring employees of the seller will NOT be consulted about measures that the buyer is planning to take – only informed about them by the seller. However, in practice the employees will be consulted on all measures.
- The consultation process must be carried out with a view to seeking agreement.
13
Q
- Consequences of failure to comply with informing/consulting obligations
A
- If the information and/or consultation process is not carried out in accordance with the Regulations, the appropriate representative may bring a claim in the Employment Tribunal, within 3 months of the transfer.
- A Tribunal has discretion to award up to 13 weeks’ actual pay per affected employee (“appropriate compensation”). This can obviously amount to a large amount of money, depending on the number of employees concerned.
- If a claim is upheld against the transferee, then the transferee will be liable to pay the appropriate compensation. But if a claim is upheld against the transferor, then (1) the transferee may be solely liable if the breach resulted from its failure to tell the transferor about any ‘measures’ it was proposing to take; and (2) in any other case, the transferee will be jointly and severally liable with the transferor.
- Typically, the buyer and seller will give cross indemnities covering liabilities arising from their respective failings in the information and consultation process.
14
Q
- Tax implications for the seller in asset sale?
A
- When a company sells a business as a going concern it is in effect selling a collection of assets including the goodwill attached to the business. The seller company will receive the consideration and will be liable to pay corporation tax on it but the way in which the corporation tax liability is calculated will depend on the nature of the assets transferred to the buyer.
15
Q
- Calculating corporation tax liability
A
- Profits or losses arising on the sale of:
- trading stock;
- goodwill; and
· Every business has this - intellectual property
- acquired or created after 1 April 2002 (in the case of goodwill and intellectual property), will be treated on the income side of the corporation tax calculation.
- Gains or losses arising on the sale of capital assets such as:
- land;
- plant and machinery;
- other goodwill; and
- intellectual property
- will be treated on the capital side of the corporation tax calculation, as either chargeable gains or capital losses.
