Commercial Issues in Corporate Transactions Flashcards
Your client (‘Company A’) is proposing to enter into a joint venture (the ‘JV’) with one other party (‘Company B’). The business to be carried on by the JV carries some risks that the two companies want to ensure that they are completely protected from. Company A is tax resident in the UK, but Company B is incorporated and tax resident in a more tax beneficial jurisdiction. As the JV business will operate in the UK, the intention is that the JV structure should also be UK entity.
What is the best advice to give to your client in relation to the structure that Company A and Company B might adopt for the JV?
As Company B may want to use a tax transparent entity, a limited liability partnership would provide protection from liability for all of its members.
(Company B would want to use a tax transparent entity, so that the only tax paid on its share of the profits would be at the beneficial rate that applies to it in its jurisdiction (which is why one of the other answers is incorrect). In addition, it is likely to want limited liability in relation to the joint venture business, which is provided for all members by a limited liability partnership (but not for general partners by a limited partnership, which is why another answer is incorrect). A contractual joint venture also does not fully protect against liabilities for the joint venture business, which is why the final answer is incorrect. See Introduction to Joint Ventures: Joint Venture Structures, Introduction to Joint Ventures: Contractual Joint Ventures, and Introduction to Joint Ventures: Tax Issues.)
Your client (‘Company A’) is proposing to enter into a contractual joint venture (the ‘JV’) with one other party (‘Company B’). The parties will be working together to install infrastructure for high-speed internet connections: Company A will provide installation skills while Company B will provide technology skills. Company A will enter into the key contract under which payment will be made for the installation and warranties will be given about the quality of the installation (the ‘Contract’); additional technology may be developed during the course of the joint venture in the name of Company B.
What is the best advice to give to your client in relation to the proposed contractual JV?
Company A and Company B may want to share the profits and liabilities from the Contract; the liabilities could be shared by Company B providing a guarantee or an indemnity and the profits could be shared by Company A making a payment to Company B.
(This is a description of how liabilities and profits could be shared in the arrangement set out in the question. Two of the other answers incorrectly summarise the law relating to the creation of a general partnership and the third answer incorrectly suggests that Company A would have an ownership right in the technology (this would only arise if the parties have contractually agreed that Company A should have such an interest). See Introduction to Joint Ventures: Contractual Joint Ventures.)
Your client (‘Company A’) is proposing to set up a 50/50 joint venture company (the ‘JV Co’) with one other party (‘Company B’). Company A and Company B are both incorporated and tax resident in the UK; the JV Co is also to be set up in the UK. Both Company A and Company B will be contributing valuable assets to the JV Co in return for the issue of shares, and the JV Co will be taking out a loan from a third-party bank (the ‘Loan’) to fund the expansion of the JV business. The parties hope to be able to exit from the JV after about five years through either a sale or a flotation of the JV.
What is the best tax advice to give to your client in relation to the proposed JV Co?
One benefit of choosing a JV Co is that the JV Co should be able to deduct the interest it pays on the Loan from its taxable profits.
(A UK tax resident company should be able to deduct interest on a loan from its taxable profits. One of the other answers is incorrect as Company A and Company B should not have to pay corporation tax on the dividends received from the JV Co, another answer is incorrect because Company A and Company B will receive JV Co shares as consideration for the assets contributed, and the third answer is incorrect because consortium relief should allow Company A and Company B to share tax losses with the JV Co. See Introduction to Joint Ventures: Tax Issues.)
Your client (‘Company A’) is proposing to enter into a joint venture (the ‘JV’) with one other party (‘Company B’). The JV would be set up as a limited company. Depending on how much your client chooses to invest in the JV, it might be structured as a 50/50 owned company (a ‘Deadlock JV’), or it might be structured 60/40, with Company B owning 60% of the shares (a ‘Minority JV’). In either case, the JV would be governed by a joint venture agreement and articles of association (the ‘JV Documents’).
What is the best advice to give to your client in relation to the provisions that might be included in the JV Documents?
If the parties agree to create a Minority JV, it will be particularly important for Company A that there is a comprehensive list of ‘Reserved Matters’ for agreement at shareholder level.
(If the parties agree a Minority JV, Company A will not be able to block decisions unless they require unanimous shareholder approval as a ‘Reserved Matter’. One of the other answers is incorrect because the directors of a UK company are required to promote the success of the company for the benefit of its members as a whole, another answer is incorrect because the provision that would protect Company A in a Minority JV is a tag along provision rather than a drag along provision, and the other answer is incorrect because a pre-emption provision would still be a sensible protection to protect each party against the other party selling out to an unapproved third party. See Joint Venture Documentation: Legal and Commercial Issues.)
Your client (‘Company A’) is proposing to set up a 50/50 joint venture company (the ‘JV Co’) with one other party (‘Company B’). Company A will be transferring part of its retail business to the JV Co when it is set up, which will mean that a number of Company A’s current employees will also transfer automatically across to the JV Co (the ‘Employees’). Company B has asked for information on the Employees to be provided to it as part of its due diligence process prior to finalising the joint venture arrangements. Company A has come to you for advice on how it might best comply with the retained UK version of the General Data Protection Regulation (‘UK GDPR’) when disclosing information about the Employees to Company B.
What is the best advice to give to your client in relation to the application of UK GDPR?
Both Company A and Company B will be data controllers in relation to the personal data that is shared during the due diligence in relation to the Employees, so they must both consider whether they are in compliance with the principles relating to the processing of personal data under UK GDPR.
(In a due diligence exercise, both companies will be data controllers in relation to the data shared, so they must both consider whether they are in compliance with UK GDPR (this is also why one of the other answers is incorrect). Another answer is incorrect because the provisions of UK GDPR would still be relevant to sharing of the information prior to the transaction and the final answer is incorrect because it would not be sufficient just to remove the names of the Employees. See Data Protection – Due Diligence and Corporate Transactions.)
Your client (‘Company A’) is proposing to enter into a 50/50 owned joint venture company (the ‘JV Co’) with one other party (‘Company B’). Company B is a large, international company with a much higher level of financial resources than your client. Your client, Company A, has asked for advice on the possible methods for breaking a deadlock, as voting at board level will be 50/50.
What is the best advice to give to your client in relation to the possible methods for breaking a deadlock?
Given the disparity in resources between the two parties, they could provide for deadlock matters to be escalated for consideration by the Chief Executive Officers of Company A and Company B, although this cannot break a deadlock where the parties are determined not to agree.
Your client (‘Company A’) is proposing to set up a 50/50 joint venture company (the ‘JV Co’) with one other party (‘Company B’). The JV Co will carry on a garage business, providing repair works to cars and lorries in the South of England: it will acquire garages in that territory from both Company A and Company B. Company A will continue to own and operate some of its own, smaller garages, also in the South of England.
What is the best advice to give to your client in relation to the application of the Enterprise Act 2002 (the ‘EA 2002’)?
There will be a merger between Company A and the JV Co that will be subject to review by the CMA if the aggregate share of supply of the garages transferred to the JV Co and the garages retained by Company A is 25% or above and that share of supply has increased from the share of supply of Company A prior to the creation of the JV Co.
(The share of supply test applies to the combined business of both the JV Co and Company A (unlike the turnover test, which is why one of the other answers is incorrect). Another answer is incorrect because Company A and Company B will not be under common control, so there will not be a three way merger. However, Company A and Company B are each likely to be in a position to exercise material influence over the JV Co, even though they only own 50% of the shares – so there will be two reviewable mergers: between Company A and the JV Co and also between Company B and the JV Co (and this is also why the final answer is incorrect). See Mergers: Competition Law and Competition Law and NSI Act: Application to Joint Ventures.)
Your client (‘Company A’) is proposing to enter into a 50/50 owned joint venture company (the ‘JV Co’) with one other party (‘Company B’). The JV Co will carry on a garage business, providing repair works to cars and lorries in the South of England: it will acquire garages in that territory from both Company A and Company B (which will be a relevant merger for review by the CMA). The parties want to include a restrictive covenant in the joint venture agreement that would prevent each of them from competing with the business of the JV Co.
What is the best advice to give to your client in relation to the restrictive covenant (including in relation to the Competition Act 1998 (the ‘CA 1998’))?
If the restrictive covenant lasts only for the life of the JV Co and only covers the South of England, it has a good chance of being an ancillary restriction for the purposes of the CA 1998: the parties would also have to take account of the general rules on restraint of trade.
It is important that both the period and the extent of a restrictive covenant are reasonable when considering whether it is an ancillary restriction (which is also why the two of the other answers are incorrect), and restraint of trade principles will also be relevant (which is why the last answer is incorrect). See Competition Law: Introduction and Competition Law and NSI Act: Application to Joint Ventures.
Your client (‘Company A’) is proposing to enter into a joint venture with two other parties (‘Company B’ and ‘Company C’). The joint venture would be set up as a limited company (the ‘JV Co’). Company A will hold 20% of the shares in the JV Co (the ‘Shares’) and will have no other voting or control rights in the JV Co. The JV Co will carry on a laser technology business and will acquire laser technology from Company C (the ‘Technology’). This technology could be used for military purposes, so it falls within the ‘Military and dual use’ sector.
What is the best advice to give to your client in relation to the application of the National Security and Investment Act 2021 (the ‘NSI Act’) to the creation of the JV Co?
The acquisition of the Technology by the JV Co will be a trigger event that could be ‘called in’ for review under the NSI Act.
(The acquisition of the Technology would be a trigger event, but an acquisition of assets does not require a mandatory clearance (this is also why two of the other answers are incorrect). The final answer is incorrect because the acquisition of a 20% shareholding is below the level for a trigger event, and Company A does not appear to be acquiring any other form of control over the JV Co. See NSI Act: Introduction and Competition Law and NSI Act: Application to Joint Ventures.)
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Commercial Issues in Corporate Transactions
Your client (‘Company A’) is proposing to set up a 50/50 joint venture company (the ‘JV Co’) with one other party (‘Company B’). Company A and Company B will each be transferring a subsidiary company to the JV Co when it is set up. The subsidiary that Company A is transferring to the JV Co (‘Sub A’) is a member of a multi-employer defined benefit pension scheme (the ‘DB Scheme’). Sub A will no longer qualify as an employer under the DB Scheme once it has been transferred to the JV Co, so it will have to leave the scheme.
What is the best advice to give to your client in relation to the debt that might arise in relation to the DB Scheme under s. 75 of the Pensions Act 1995 (a ‘s. 75 Debt’) when Sub A leaves the scheme?
Sub A will be liable for a s. 75 Debt if the DB Scheme is in deficit, but it might be possible to come to an arrangement to defer the debt if the trustees of the DB Scheme agree.
(There are some statutory arrangements that could be reached with the trustees of the DB Scheme to defer a s. 75 Debt. One of the other answers is incorrect because the s. 75 Debt provisions would only apply if the DB Scheme is in deficit, The other two answers are incorrect because a s. 75 Debt could also arise if Sub A transfers its business to the JV Co and has no employees left in the DB Scheme, but it would not transfer across to the JV Co. See Pension Schemes: Details of Defined Benefit Schemes.)
Your client (‘Company A’) is proposing to enter into a 50/50 owned joint venture company (the ‘JV Co’) with one other party (‘Company B’). Company A is transferring a tutoring business to the JV Co, including some employees and some self-employed consultants (the ‘Business Personnel’). In addition, Company A has agreed to provide the JV Co with ongoing support to assist with its accounts and finance function: this will involve a number of Company A employees who have not previously worked with the transferring business and who will also continue to provide accounts and finance support to Company A itself (the ‘Other Personnel’).
What is the best advice to give to your client in relation to the Company A personnel involved (bearing in mind, among other things, the provisions of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’))?
Not all of the Business Personnel will transfer across to the JV Co under TUPE so a contractual solution will be needed for those who do not; the services of the Other Personnel should be provided to the JV Co under a services agreement.
(Some of the Business Personnel are consultants, so they would not transfer across under TUPE (which is also why two of the other answers are incorrect): the Other Personnel will not be working for the JV Co exclusively, so a services agreement would be most appropriate here (not a secondment: this is also why two of the answers are incorrect). See Joint Ventures: TUPE and Related Employee Issues.)
Your client (‘Company A’) is proposing to enter into a joint venture with one other party (‘Company B’). The joint venture would be set up as a limited company (the ‘JV Co’). Each of Company A and Company B is transferring a business to the JV Co when it is set up: this will involve employees of the Company A business (the ‘A Employees’) and employees of the Company B business (the ‘B Employees’) transferring to the JV Co pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’). The A Employees work on a shift pattern from 8 to 4 or from 12 to 8, whereas the B Employees work on a shift pattern of 12 midnight to 12 noon or from 12 noon to 12 midnight. The JV Co would like to change the terms of employment of the A Employees to match those of the B Employees, with a consequent increase in the amount that they are paid.
What is the best advice to give to your client in relation to the changes that the JV Co is planning?
If the terms of employment of the A Employees already allow for such changes in the shift pattern at the employer’s discretion, the JV Co could make the change without there being a problem under TUPE.
(This is an exception to the rule that changes to the terms and conditions of employees that have transferred under TUPE will be void (and the existence of such exemptions is the reason that one of the other answers is incorrect). Another answer is incorrect because changes cannot be imposed unilaterally without consent from employees, even if TUPE does not apply and the final answer is incorrect because the rules about amending terms and conditions also apply to changes made prior to a TUPE transfer if the reason for making the changes is the transfer. See Employees: TUPE on an Asset Sale.)
