Commercial Practice - Commercial contracts in practice Flashcards
What does a due diligence exercise involve? (1)
Carrying out a comprehensive appraisal of a business, to establish its assets and liabilities and to evaluate its commercial potential
What is the target? (1)
A company which another company intends to buy.
What information in a data room will the prospective buyer wish to review? (5)
Key contracts, fina5ncial statements, employee information, business assets information and intellectual property.
What is a common way for the seller to make information about the target to a potential buyer, so it can carry out due diligence? (1)
Data room.
What may a buyer contractually agree before being granted access to a data room? (1)
To keep the information confidential.
What is a traditional data room? (2)
Physically-secure and continually-monitored normally in the seller’s / solicitor’s office. The buyer / seller will visit this room.
What is a virtual data room? (2)
Significantly cheaper and more widely used. A website with limited-controlled access using a secure log in supplied by the seller, potential buyer is given avves and can review documents in the data room.
Who carries out legal due diligence? (1)
Buyer’s solicitors.
Who carries out financial due diligence? (1)
Buyer’s accountants.
What are the ways to acquire the business of a private limited company? (3)
- By acquiring all of the share in the company (share sale)
- By acquiring the business of the company as a going concern or by acquiring a particular part of the business of the company as a going concern (trading division) known as an asset sale / business sale.
- By purchasing the particular assets that you require known as a sale of assets.
What are the principle documents in a share sale between a seller and a buyer? (6)
A confidentiality agreement; heads of terms; a due diligence questionnaire and a due diligence report; an acquisition agreement; and a disclosure letter.
What is a confidentiality agreement? (2)
In consideration for providing the buyer with information regarding the target and / or seller, the buyer agrees to keep such information secret, often indefinite and survive the transaction. The buyer will usually ask for mutual confidentiality undertakings.
What is the due diligence questionnaire and report? (4)
Buyer is always subject to the maxim of caveat emptor, which means it is the buyer’s responsibility to ensure that it obtains detailed information relating to the company or business that it is going to purchase prior to completion. The buyer obtains this information through sending a due diligence questionnaire to the seller and attending a data room. On completion of due diligence, the buyer’s lawyers and accountants will produce due diligence reports in which they will highlight areas for concern such as a reduction in the purchase price and / or warranties and indemnities that should be included in the acquisition agreement.
What concerns could arise during due diligence? (3)
High-value litigation against the target, anything significant with regard to expiration of the contract and a change of control clause which would be triggered by the acquisition of the target.
What is an acquisition agreement? (4)
The buyer’s lawyers will produce the first draft of the acquisition agreement for negotiation by the parties either during or after completion of the due diligence process. (a) consideration – how is the buyer going to pay for the target, when is it going to be paid and what form is the consideration going to take. (b) Indemnities are promises made by the seller to reimburse the buyer for any loss it suffers in connection with contingent liabilities. (b) Warranties are statements of fact which the seller makes in relation to specific aspects of the target, if they are found to be untrue the buyer will have a contractual claim against the seller for breach of warranty.
