Preliminary considerations

Question 1

How does the buyer acquire knowledge of the Target?

Answer 1

Through the due diligence process

Question 2

• A party interested in buying a company or business (the ‘Target’) will wish to learn all about the Target to ensure that it is:

Answer 2

· a worthwhile acquisition; and
· worth the consideration being paid.

Question 3

• The due diligence process is expensive and time-consuming, so a buyer will not wish to embark on the process until it can be sure that:

Answer 3

· the seller is seriously committed to selling the Target at a price the buyer is prepared to pay; and
· the seller is not currently engaged in negotiations with one or more other potential buyers.

Question 4

Before going through the due diligence process the Seller would want to insure that ….

Answer 4

· it obtains the best possible price for the Target; but that
· the commercial integrity of the Target is not compromised as a result of an aborted sale.

Question 5

• If, however, the seller is going to release confidential information to the prospective buyer then it will want to know that:

Answer 5

· the buyer is seriously committed to the purchase and is not a time waster; or
· worse still, that the buyer is not an unscrupulous competitor seeking to obtain trade secrets for the benefit of its own business.

Question 7

• The way in which the parties settle their respective concerns will be to enter preliminary documentation in the form of:

Answer 7

· heads of terms;
· confidentiality provisions;
· and lock-out or exclusivity provisions.

Question 8

• Bilateral sale?

Answer 8

• seller negotiates with just one buyer.
• In such a situation, the buyer may take the initiative in the due diligence process by sending the seller a due diligence questionnaire but often the seller will make available due diligence documentation for the buyer’s review (often via a data room).

Question 9

• In a bilateral sale, the parties will usually enter into preliminary documentation in the form of:

Answer 9

· heads of terms(sometimes known as heads of agreement, a memorandum of understanding, a letter of intent or a term sheet);
· confidentiality provisions; and
· exclusivity (or ‘lock-out’ ) provisions.

Question 10

Are Heads of Terms legally binding?

Answer 10

• They act as a road map for the full form contract and, generally speaking, are not legally binding although they do have some moral force. There are some exceptions to this

Question 11

What is legally binding in Heads of Terms?

Answer 11

· Exclusivity agreement
· Confidentiality agreement; and
· Provision for payment of costs and break fees if the deal does not proceed.

Question 12

• The heads of terms are likely to include a combination of the following non-binding clauses and binding clauses:

Answer 12

· Non-binding
* The structure of the transaction
* The purchase price
* The form of consideration
* Any conditions (e.g. consents)
* Timetable for completion
* Responsibility for drafting the contractual documentation
· Binding
* Confidentiality
* Exclusivity/duration of negotiations
* Costs and break fees
* Governing law and jurisdiction

Question 13

When are confidentiality agreements entered into and how?

Answer 13

* Before negotiations begin, and certainly before the prospective buyer is given any sensitive information about the Target or the seller, the seller will ask the buyer to enter into a confidentiality agreement (also known as a non-disclosure agreement) pursuant to which, in consideration for the seller providing the buyer with information regarding the Target and the seller, the buyer agrees to (and agrees to procure that its advisers will) keep such information secret. It is quite likely that the seller will want to ensure that even the fact that the Target is for sale is kept strictly confidential. Knowledge, or even rumours, of a potential sale can have an unsettling effect on the Target’s employees, its customers and suppliers. This can undermine the Target’s goodwill. It may involve the loss of sales and, possibly, the loss of key staff during the sale process. At worst, it can lead to a permanent loss of customers to a competitor.

Question 14

How long do confidentiality agreements usually last?

Answer 14

• The obligations in the confidentiality agreement will generally survive even if the transaction subsequently does not complete. It was common for confidentiality agreements to have an indefinite term, but it is becoming more common to see confidentiality agreements with a fixed duration, with the duration depending upon the nature of the information the agreement is intended to protect. The buyer will usually also ask for confidentiality undertakings from the seller in so far as the seller obtains any confidential information relating to the buyer during the course of the negotiations. The acquisition agreement will also usually contain confidentiality undertakings from the seller to the buyer concerning information about the Target after completion of the sale.

Question 15

How can the confidentiality agreement be enforced?

Answer 15

• Often the Target may also be a party to the confidentiality agreement in order that the Target can enforce the obligations it contains.
• Alternatively, if the Target is not a party to the agreement, then they will still have rights to enforce the agreement under the Contracts (Rights of Third Parties) Act 1999 provided.
  · the agreement expressly says they can; or
  · the term purports to confer a benefit on them.
• In the latter case the Target can enforce the agreement unless the agreement expressly excludes this right.
• The confidentiality agreement will be entered into between the potential buyer and the seller. A potential buyer will, however, need to involve others in the process of evaluating the Target. This will generally include senior employees of the buyer and its professional advisers, banks and consultants. This may result in confidential information being passed on to these other parties.
• The seller will often require the potential buyer to procure that these parties are also bound to treat the information as confidential. The seller may even require these third parties to enter into confidentiality agreements with it, before they receive any confidential information.

Question 16

What is a lock-out agreement?

Answer 16

• Given that a due diligence investigation is an expensive and time-consuming exercise, a prospective buyer is likely to want some form of protection against losing out to a rival bidder. Whether or not the buyer is able to secure this protection will depend on the strength of the buyer’s bargaining position. If the buyer is able to obtain protection, this will take the form of an exclusivity agreement, also known as a lock-out agreement.

Question 17

When us a lock-in agreement enforceable?

Answer 17

provided that it was certain (so, for a fixed and specified period) and supported by consideration or made under seal (by deed).

Question 18

What are break-fee agreements?

Answer 18

• Traditionally, break fee agreements provided for a fee to be paid to the buyer if a specified event occurred which prevented the proposed purchase of the target from completing.
• Nowadays, break fee agreements may work both ways - with each party agreeing to pay the fees of the other party if the first party fails to complete for specified reasons. The extent to which the fees will be paid, and the trigger events, will depend on the bargaining strengths of the parties concerned.

Question 19

Does FSMA apply to share sales?

Answer 19

• FSMA applies to share sales, so it is important for clients and their advisers to consider both the general prohibition on carrying out regulated activities under s. 19 FSMA and the restrictions on financial promotions under s. 21 (1) FSMA.

Question 20

o When giving advice to a seller on a share sale, it is important to consider the provisions of the Financial Services and Markets Act 2000 (‘FSMA’). In this context, there are a number of provisions of which clients and their advisers need to be aware:

Answer 20

 The general prohibition under s.19(1) FSMA; and
 The restrictions on financial promotion under s.21(1) FSMA.

Question 21

• The general prohibition under s.19(1) FSMA

Answer 21

o applies to solicitors carrying out ‘regulated activities’. The same restrictions apply to clients. On this basis, a client can only carry on a regulated activity if it is authorised to do so or if a relevant exemption applies.
o Specified activity + specified investment = regulated activity
o ‘Specified activity’ and ‘specified investment’ are defined in Parts I and III FSMA 2000 (Regulated Activities) Order 2001

Question 22

o Specified activities include:

Answer 22

 Art 14: ‘dealing in investments as principal’
 Art 21: ‘dealing in investments as agent’
 Art 25: ‘arranging deals in investments as agent’
 Art 53: ‘advising on the merits’
* A group of assets or a business is not a ‘specified investment’. So, in the context of a business sale, FSMA is not relevant. FSMA does apply to share sales, as shares are defined as a specified investment.

Question 23

• Exclusions from the general prohibition

Answer 23

o There are both specific and general exclusions from the FSMA general prohibition under FSMA 2000 (Regulated Activities) Order 2001. The one that is most likely to apply on the sale of the entire issued share capital of a corporate subsidiary is Art 70.

Question 24

o Art 70 provides that a person will not be carrying on an activity of a kind specified by articles 14, 21, 25 and 53 by entering into a transaction:

Answer 24

· If the transaction is to acquire or dispose of shares in a company and the shares being sold/bought consist of or include 50% or more of the voting shares in the body corporate AND the acquisition or disposal is between parties each of whom is: a body corporate; a partnership; a single individual; or a group of connected individuals; OR
· If the transaction is to acquire or dispose of shares in a company and the shares, together with any already held by the buyer, consist of or include at least 50%of the voting shares in the body corporate AND the acquisition or disposal is between parties each of whom is: a body corporate; a partnership; a single individual; or a group of connected individuals**.

Question 25

• A group of ‘connected individuals’ is a single group of persons each of whom is or will be either:

Answer 25

· (i) a director or manager of the company being sold; or
· (ii) a close relative of any such director or manager;
· or (iii) a person acting as trustee for any of the persons in (i) or (ii).

Question 26

• Restrictions on financial promotion: s21 FSMA

Answer 26

o S21 FSMA contains a general prohibition on all types of financial promotion and marketing of investment activity and regulates all forms of communication (for example: adverts; cold-calling; web sites; and general advertising).
o A person must not, in the course of business communicate an invitation or inducement to engage in investment activity unless they are an authorised person, or the contents of the communication have been approved by an authorised person.

Question 27

What does s21 FSMA apply to?

Answer 27

o S. 21(1) applies to share sales because shares fall within the type of investments in the FSMA 2000 (Financial Promotion) Order 2005 (‘FPO’). It does not apply to business sales. This means that approaching potential buyers to induce them to enter into negotiations for the acquisition of shares in a company would be caught by the financial promotions restrictions. This has serious consequences; failure to comply with s.21(1) is a criminal offence which carries the sanction of a fine or imprisonment.

Question 28

o The FPO contains over 60 exemptions from the restrictions contained in s.21 FSMA. The most relevant of these exemptions to the types of transactions covered by this knowledge stream are:

Answer 28

· Art 19(1),where communications are made only to recipients whom the person making the communication believes - on reasonable grounds - to be an investment professional.
· Art 49(2)(a), where the communication is made to…any body corporate which has, or which is a member of the same group as an undertaking which has, a called up share capital or net assets of not less than:
* (if the body corporate has more than 20 members or is a subsidiary undertaking of an undertaking which has more than 20 members), £500,000;
* otherwise, £5 million.
· Art 62(2)(b)(ii), where the communication related to a transaction which meets the same conditions as set out in art 70 RAO, which includes the transaction being reasonably regarded as the acquisition of day to day control of the affairs of the body corporate.
 It is only necessary to qualify for one of the exemptions under the FPO in order to be exempt from the restrictions contained in s. 21(1) FSMA.

Question 29

Prospectus requirement for FSMA?

Answer 29

o Another aspect of the FSMA regime that may at first glance appear to apply on a sale of shares is the requirement to issue a prospectus as set on in s.85 FSMA and the Prospectus Regulation Rules.
o S. 85(1) FSMA states_‘It is unlawful for transferable securities… to be offered to the public in the United Kingdom unless an approved prospectus has been made available to the public before the offer is made’._
o This would include offering to sell shares in a private company (but not the assets of a business). Where a prospectus is required, this is a very detailed document which will be costly and time-consuming to produce, and which must be approved by the FCA before being published. This would significantly slow down the timing of the sale. There are a number of exemptions from the requirement to issue a prospectus, which are set out in the Prospectus Regulation Rules. Most offers to sell shares in a private company will fall within the exemption for offers made to fewer than 150 persons, other than qualified investors.

Question 30

• The two key pieces of data protection legislation in the UK are:

Answer 30

• UK GDPR (see below); and
• the Data Protection Act 2018 (‘DPA’)
  1. The two pieces of legislation sit alongside each other: UK GDPR sets out the key principles and obligations and DPA supplements its application (e.g. by providing exemptions)

Question 31

What is a data subject?

Answer 31

• A ‘data subject’ is an identified or identifiable natural person (a living individual) to whom personal data relates.

Question 32

What is personal data?

Answer 32

• ‘Personal data’ is any information relating to a data subject that identifies that person or makes them identifiable – for example, information such as birth dates and addresses could make a person identifiable.

Question 33

What is processing?

Answer 33

Processing’ is defined very widely and includes any operation or set of operations performed on personal data (including simply holding or deleting data).

Question 34

What is a controller?

Answer 34

• A ‘controller’ is someone who decides the purposes and means of the processing of personal data. The controller is subject to the key obligations in the DPA and UK GDPR.

Question 35

What is a processor?

Answer 35

• A ‘processor’ is someone who processes personal data on behalf of a controller. A processor is subject to some direct statutory obligations but will also have contractual obligations to the controller.

Question 36

• All processing of personal data must comply with the six principles set out in Art. 5 of UK GDPR:

Answer 36

1. ‘Lawful and fair processing’ principle - personal data must be processed lawfully, fairly and in a transparent manner in relation to the data subject
2. ‘Purpose limitation’ principle - data must be collected for specified, explicit and legitimate purposes and not further processed in a manner that is incompatible with those purposes.
3. ‘Data minimisation’ principle - personal data must be limited to what is necessary in relation to the purposes for which the data is processed
4. ‘Accuracy’ principle -personal data must be accurate and, where necessary, kept up to date
5. ‘Storage limitation’ principle - personal data must be kept in a form which permits identification of data subjects for no longer than is necessary for the purposes of the processing
6. ‘Integrity and confidentiality’ principle - personal data must be processed in a manner that ensures appropriate security of the personal data

Question 37

• A controller must comply with (and document compliance with) UK GDPR:

Answer 37

· Implement appropriate data protection policies (Art. 35)
· Comply with data protection principles (Art. 5)
· Implement technical and organisational measures to ensure compliance (Art. 24(1) - compliance must be ‘by design and by default’ (Art. 25)
· Where a processor is involved, ensure that they comply with a written processing contract (Art. 28)
· Carry out a data protection impact assessment (DPIA) for operations that present specific risks to data subjects due to the nature or scope of the processing (Art. 35)
· Maintain a record of its processing activities (Art. 30(1))
· Appoint an independent data protection officer if the business involves large scale (i) monitoring of data subjects or (ii) processing of special categories of information (Art. 37)

Question 38

• In addition to the general obligations as to how their data is processed, data subjects also have certain specific rights under UK GDPR, which include:

Answer 38

· A right to be informed of certain information relating to the processing of their data (Arts. 13 and 14)
· A right of access to their personal data (Art. 15)
· A right to rectification and/or erasure of personal data (Arts. 16 and 17)

Question 39

• Data subjects have a right to be provided with certain prescribed fair processing information. In particular, the data subject will need to be informed:

Answer 39

 of the fact that their data will be processed, and
 of the purpose for which their data will be processed.

Question 40

How are data subjects given information and when?

Answer 40

• The required information is often provided by way of a privacy notice. If the controller uses a well drafted privacy notice, this should be wide enough to cover both the immediate use of the data and other potential uses.
• Where data is collected from the data subject, the information must be provided at the time the data is obtained (Art. 13) - where data is received from a third party, the new controller has up to a month to provide the information (and it may be possible to delay further in confidential circumstances) (Art. 14)

Question 41

• Controllers have an obligation to report personal data breaches to the ICO and potentially also to the data subjects impacted by the breach:

Answer 41

 UK GDPR
* Breaches must be reported to the ICO without delay and where feasible within 72 hours of the controller becoming aware of the breach UNLESS the breach is unlikely to result in a risk to the rights and freedoms of the data subject(s) (Art. 33).
* Data subjects must also be informed of a breach without delay IF the breach is likely to result in a high risk to their rights and freedoms (Art. 34).
 PECR
* Under the PECR, certain controllers – such as internet service providers - must notify the ICO of a personal data breach within 24 hours.
* Data subjects must also be informed of a breach without undue delay IF the breach is likely to adversely affect their personal data or their privacy.

Question 42

• Consequences of Breach of FSMA?

Answer 42

• The ICO can levy a fine of the higher of £17.5 million and 4% of the total worldwide annual turnover of the undertaking being fined for breaches of key provisions, such as the data provision principles or the data subject’s rights. (Art.83)
• The ICO can levy a fine of the higher of £8.7 million and 2% of the total worldwide annual turnover of the undertaking being fined for breaches of other provisions, such as record keeping. (Art. 83)
• Data subjects also have a right to compensation for non-material damages, including distress (Art. 82(1)) AND The reputational damage to a business can cause even greater issues.

Question 43

• Application of Data Protection in a corporate transaction?

Answer 43

• Vast amounts of information are made available to, and are transferred between, parties in a corporate transaction.
• As a result, data protection and the relevant rights and obligations will need to be considered by all parties throughout the course of a corporate transaction.
• By way of examples, a seller will need to consider data protection issues when disclosing information in a data room and a buyer might be required to provide data protection undertakings in a confidentiality agreement.

Question 44

• Types of consent:

Answer 44

· Shareholder
· Regulatory
· Contractual

Question 45

• Another important consideration in an acquisition is whether consent from particular authorities for the change in control of the Target is necessary. Some examples include:

Answer 45

 Confirmation that the Competition and Markets Authority (or the Secretary of State, in public interest cases) will not refer the acquisition for a Phase 2 investigation(you will consider this issue in later Topics); and/or
 specific consents due to the nature of the Target’s sector, for example:
* certain newspaper mergers are prohibited without consent of the Secretary of State;
* when acquiring a company with oil and gas interests or a UK utility licence, consent of the relevant regulator is often required; and
* aircraft operators are required to hold an Air Operators’ Certificate issued by the Civil Aviation Authority.
- c)specific consents for regulated financial services firms:
 *where the Target group includes a company regulated by the Financial Conduct Authority (‘FCA’) - for example, a company offering consumer lending facilities - consent for the change in control must be obtained from the FCA. There are different thresholds depending on the classification of the firm but an acquisition, or disposal, of just 10% can require consent from the FCA.
 *where the Target group includes a company regulated by the Prudential Regulation Authority (‘PRA’) - for example, a bank, insurance company or investment firm - consent for the change in control must be obtained from the PRA. A holding of just 10% in an PRA-authorised company or its parent constitutes ‘control’ for these purposes.
- If a company is regulated by both the PRA and the FCA only the consent of the PRA is required.

Question 46

When are contractual consents needed?

Answer 46

• Contractual consents may be required from certain third parties contracting with the target due to change of control provisions in the contracts. These third parties may include (for example) suppliers, landlords and/or lenders- Contractual consents may be required from certain third parties contracting with the target due to change of control provisions in the contracts. These third parties may include (for example) suppliers, landlords and/or lenders

Question 47

• Effect of consents on timing?

Answer 47

• It may be necessary to delay completion until all of the necessary consents have been obtained. This means a split between signing and completion, with the consents being listed as conditions precedent.
• The parties will then be contractually bound to proceed with the transaction as long as the condition(s) precedent are met (that is, that the consents are obtained).

Question 48

What is a listed company?

Answer 48

‘listed’ company means a company which has shares listed on the premium segment of the Official List and traded on the Main Market of the London Stock Exchange.

Question 49

• Under UK MAR, there is a general obligation on a listed company to disclose inside information, as soon as possible for example, major new developments if

Answer 49

· the information is not already public knowledge; and
· it may have a significant effect on the company’s share price.

Question 50

• UK MAR permits disclosure to the public of inside information to be delayed provided that all of the following conditions are met:

Answer 50

· immediate disclosure is likely to prejudice the ‘legitimate interests’ of the listed company; AND
· the delay of disclosure is unlikely to mislead the public; AND
· the listed company is able to ensure the confidentiality of the information.

Question 51

What does legitimate interests include?

Answer 51

include ongoing negotiations. Information does not need to be disclosed unless there is a breach of confidence during the negotiations.

Question 52

What are the listing rules?

Answer 52

• The Listing Rules classify transactions (including acquisitions/disposals of shares, businesses or assets) entered into by a premium listed company, or its subsidiaries, according to certain class tests to determine whether prior shareholder approval is required.

Question 53

• There are four class tests or percentage ratio tests outlined in the Listing Rules:

Answer 53

 the gross assets test (gross assets of the target business or company divided by gross assets of the listed company);
 the profits test (profits attributable to the target business or company divided by the profits of the listed company);
 the consideration test (consideration to be paid for the target business or company as a percentage of the market value of all the ordinary shares of the listed company); and
 the gross capital test (gross capital of the target company or business divided by the gross capital of the listed company).
- These tests will determine whether the transaction is a Class 1 transaction or a Class 2 transaction or is exempt from the Listing Rules.

Question 54

Class 1 thresholds and consequences?

Answer 54

• Class 1 transaction: If any percentage ratio is 25% or more but less than 100%:
  · Step 1: A Regulatory Information Service must be notified and provided with prescribed details of the transaction as soon as the terms of the transaction have been agreed. This will generally be on exchange of contracts for the transaction.
  · Step 2: An explanatory circular (approved by the FCA) must be sent to shareholders.
  · Step 3: Prior shareholder approval of the transaction must be obtained by an ordinary resolution.
  · The timetable for a Class 1 transaction will be delayed by the need to factor in (1) preparation of the circular and its approval by the FCA and (2) exchange and completion being split because a General Meeting will need to be convened for the listed plc to obtain shareholder approval. Obtaining shareholder consent will need to be a condition precedent to completion.

Question 55

Class 2 thresholds and consequences?

Answer 55

• Class 2 transaction: if any percentage ratio is 5% or more but all ratios are less than 25%
• only · Step 1: A Regulatory Information Service must be notified and provided with prescribed details of the transaction as soon as the terms of the transaction have been agreed. This will generally be on exchange of contracts for the transaction.

Question 56

Listing rules and related party?

Answer 56

• The Listing Rules (and in particular LR 11) impose procedural controls over corporate transactions between a listed company (or any of its subsidiaries) and a related party.

Question 57

What is a related party under the listing rules?

Answer 57

• Related party: substantial shareholder (holding 10% or more of the shares); or director; or shadow director; or a person who exercises significant influence over a listed company and their associates.

Question 58

What is a large related party transaction and what does it involve?

Answer 58

• A large related party transaction (any percentage ratio is 5% or more) will require an RIS announcement; circular (including a fair and reasonable statement) and shareholder approval (the related party cannot vote on this resolution);

Question 59

What is a smaller related party transaction and what does it involve?

Answer 59

• A smaller related party transaction (all percentage ratios are less than 5% but any one is more than 0.25%) requires a fair and reasonable statement from an independent advisor and an RIS announcement.
• A small related party transaction (all percentage rations are 0.25% or less) is exempt.

Question 60

Related party under Disclosure and Transparency Rules?

Answer 60

the definition of related party under DTR 7.3 is not the same as the definition of related party under LR 11 and is slightly wider. As a result, there may be a small number of transactions which are classed as related party transactions under DTR 7.3 but are not within the scope of LR 11. Compliance with LR 11 satisfies the requirements of DTR 7.3

• A related party transaction must be classified by size according to the class tests in the DTRs (which broadly mirror the class tests that apply for the purposes of LR 11). A material related party transaction (any percentage ratio is 5% or more) will require an RIS announcement and board approval (the related party cannot vote on this resolution). Unlike LR 11 no shareholder approval is required.

Question 61

What is the CMA’s function?

Answer 61

 The CMA’s function is to review information relating to a relevant merger situation to consider whether it may be expected to result in a ‘substantial lessening of competition’ (‘SLC’) in a UK market.

Question 62

When does a merger occur?

Answer 62

• A merger occurs where two enterprises cease to be distinct. It therefore occurs if they are brought under common ownership or control.

Question 63

• Common control can be acquired through:

Answer 63

 a legal, controlling interest (for example, a majority share stake); or
 an ability to control policy (for example, a lower share stake if not all shareholders usually exercise their vote); or
 An ability to exercise ‘material influence’ (for example, a 25% share stake or lower, depending on circumstances)
* Acquisition of 100% of a company or a business would clearly fall within this definition (material influence) – but acquisitions of a smaller proportion of a company’s shares (or a collection of assets) could also count as a merger.

Question 64

• A merger may be reviewed by the CMA only if:

Answer 64

· The value of the turnover in the UK of the target enterprise exceeds £70 million; and/or
· The combined enterprise will supply or acquire 25% or more of any goods or services in the UK (or a substantial part of the UK) and the transaction increases the overall share (i.e. will lead to an ‘increment’)- so if one party had an existing share of supply of 25%+, the merger will still be caught if this share would be enlarged by the transaction.

Question 65

What happens if you don’t notify CMA?

Answer 65

 Notification is voluntary but, if the parties do not notify, the CMA can take its own action to refer a completed merger to a Phase 2 investigation (see below) within four months of the later of completion and the transaction becoming public/coming to the notice of the CMA.

Question 66

• Phase 2 of CMA notification process?

Answer 66

 Investigation in depth, while the merger is suspended, giving the CMA’s Inquiry Group a period of 24 to 32 weeks to decide on whether it may be expected to result in an SLC. This could lead either to:
* clearance (with or without remedies); or
* blocking/unwinding of the merger
 The parties may instead decide to submit an informal briefing paper to the CMA, explaining why there are no competition issues – the CMA may then indicate that it has no further queries on the merger BUT it could still choose to take action later in the process.

Question 67

CMA

• Acceptable UILs/Remedies?

Answer 67

• Where a relevant merger is cleared by the CMA on the basis of undertakings or agreed remedies, these should be clearly able to address the identified competition issue (particularly where the CMA is accepting the approach in lieu of a reference to Phase 2)
• Structural undertakings
  · Note: This is the CMA’s preferred route – generally to be completed within a time frame (for example, 12 months)
  · Example 1: Sale of a part of the business to an approved purchaser
  · Example 2: Licensing of know-how or intellectual property rights
• Behavioural Undertakings
  · Note: These are less likely to be acceptable, as they require ongoing monitoring.
  · Example 1: Change to sale practices / a cap on pricing
  · Example 2: Provision of access for third parties to essential facilities
• Consequences of Breach
   The CMA can impose ‘interim measures’ at any time during its investigation:
• These require the two merging businesses to be held separate during the investigation.
• The CMA can impose penalties of up to 5% of global group turnover for any breach of such measures.
   Failure to comply with agreed undertakings / remedies on clearance can lead to enforcement by:
• Application by the CMA for injunctions or ‘interdicts’; and/or
• Claims for damages by any party affected by the contravention.

Question 68

• UK Merger Clearance: Condition Precedent?

Answer 68

 The risk of completing an acquisition that may raise competition concerns with the CMA is primarily with the buyer.
 This is because the CMA could direct the buyer to unwind the transaction OR accept remedies that could undermine the business case for the acquisition – even after completion of the transaction.
 The buyer may therefore require the inclusion of a condition precedent in the acquisition agreement – making completion conditional on the transaction being cleared at Phase 1 (or possibly at Phase 2), on terms that are satisfactory to the buyer.

Question 69

• Phase 1 (including pre-notification) of CMA notification process?

Answer 69

 Submission of a draft Merger Notice, on which the CMA will then raise queries in order to ensure it is complete (a process which may take some weeks). Once the CMA accepts the Merger Notice as complete, it has 40 working days to decide whether to:
* refer the merger for Phase 2 investigation (because it reasonably believes that there is a realistic prospect that the merger would result in a substantial lessening of competition (SLC)); or
* clear it unconditionally; or
* clear it on the basis of ‘undertakings in lieu’ (UILs).

Question 70

• To ascertain whether the merger might be subject to UK merger control, a legal adviser should consider:

Answer 70

 Does the target have a turnover in the UK in excess of £70 million?
 Will the merged entity have a share of supply or acquisition in the UK of 25% or more that has been increased by the merger?
· The buyer may want to include a condition precedent in the acquisition agreement making completion conditional upon clearance.

Question 71

• European merger control?

Answer 71

• If a transaction satisfies the jurisdictional criteria set out in the European Union Merger Regulation, the European Commission has the power to scrutinise cross-border mergers and acquisitions and to prohibit them if incompatible with the EU Merger Regulation.
• The EU Merger Regulation applies to concentrations which have a ‘EU Dimension’.
• Concentrations can include any situation where there is a change of control. ‘EU Dimension’ is calculated by reference to turnover.
• A concentration will be prohibited if it “significantly impedes effective competition in particular as a result of the creation or strengthening of dominance”.
• Concentrations MUST be notified “prior to their implementation and following the conclusion of the agreement” but the concentration cannot be put into effect unless approved by the Commission. The acquisition agreement MUST therefore contain a condition precedent that the agreement will not come into force until the Commission has approved the transaction. Once signing has occured the transaction must be notified for investigation and approval.
• The Commission has 25 working days to make its initial report after which it must give clearance or move to Phase II. The Commission has 90 working days to reach a conclusion in Phase II.

Question 72

What does the NSI Act apply to?

Answer 72

• The regime introduced by the NSI Act applies to specified categories of transaction or investment that involve the acquisition of control over qualifying entities or qualifying assets.
• Both qualifying entities and qualifying assets must either be formed or situated in the UK or have a specified connection to the UK (for example, an entity that carries on activities in the UK).

Question 73

What are qualifying entities?

Answer 73

include any type of entity, whether or not a legal person – so could include a company or a partnership.

Question 74

What are Qualifying assets?

Answer 74

comprise land, tangible moveable property (for example, machinery) and IP-type assets

Question 75

What are IP-type assets?

Answer 75

for these purposes include ideas, information or techniques which have industrial, commercial or other economic value

Question 76

NSI Act trigger events?

Answer 76

• The acquisition of control “trigger events” comprise:-
   the acquisition of votes or shares in a qualifying entity exceeding a threshold of 25% or 50%, or meeting or exceeding a threshold of 75%;
   the acquisition of voting rights that enable or prevent the passage of any class of resolution governing the affairs of the qualifying entity;
   the acquisition of material influence over a qualifying entity’s policy; and
   the acquisition of a right or interest in, or in relation to, a qualifying asset providing the ability to
• use the asset, or use it to a greater extent than prior to the acquisition; or
• direct or control how the asset is used, or direct or control how the asset is used to a greater extent than prior to the acquisition.

Question 77

NSI Act

When is madatory clearance required?

Answer 77

• Where the trigger event
• falls within the first two control categories on the previous slide (so not including any business sale); and
• involves a qualifying entity operating in one of the 17 sectors,
• then the acquirer of the shares or voting rights is required to seek authorisation and obtain approval from the ISU before completing their acquisition.
• Any transaction that falls into this category would therefore require a condition precedent to completion.

Question 78

NSI Act

What happens if a company that id required seek authorisation does not?

Answer 78

• If they do not, then the transaction will be void and of no legal effect and the acquirer (and its directors) may be subject to additional criminal or civil penalties.

Question 79

• Once the application for authorisation and approval from the ISU has been submitted the ISU has:

Answer 79

 i)30 working days to review the notification;
 ii)30 (further) working days to undertake a national security assessment. This can be extended by 45 working days and, potentially, a further period.
 iii)(Note: the ISU can issue information” or “attendance” notices at any point and the clock stops until the notice is complied with or the deadline to comply with the notice has passed.)

Question 80

What is a call in notice?

Answer 80

• The ISU may “call in” for review any transaction that is subject to mandatory clearance, and also any other transaction involving a trigger event where there is a reasonable suspicion that it could give rise to a risk to national security. These transactions could include business as well as share acquisitions or even the simply acquisition of a right or licence to use business assets.
• A call-in notice may be issued at any time while a transaction is in progress or contemplation, or within six months of the ISU becoming aware of a trigger event taking place, provided this occurs within five years of its completion.
• The call-in power can also operate retroactively to capture transactions raising national security concerns which were completed between 12 November 2020 and commencement of the full regime.

Question 81

• The term ‘risk to national security’ involves consideration of key risk factors:

Answer 81

 whether the target is or could be used in a manner that poses a risk to national security;
 whether the buyer has characteristics that suggest a risk to national security; and
 the level of control being acquired.

Question 82

Why do companies choose to voluntarily notify to the ISU?

Answer 82

• Many transactions that are not within a high risk sector but are theoretically subject to the call-in power will clearly pose no risk to national security.
• However, if the parties to a transaction are concerned that the power could be exercised and do not wish to complete their transaction with this risk hanging over them, they may use a voluntary notification regime to obtain a decision from the ISU.
• As in cases where there may be a competition issue, the parties may then choose include a condition precedent in the transaction agreement, requiring that a positive decision is received following voluntary notification to the ISU.

Question 83

• If a notifiable transaction subject to mandatory clearance is completed without prior approval:

Answer 83

 The transaction is automatically void;
 The directors of the acquirer commit a criminal offence, punishable with a prison sentence of up to five years, as well as potentially being subject to civil fines;
 Civil sanctions for the acquirer may include a penalty up to a maximum of the higher of:
* 5% of the company’s worldwide group turnover; and
* £10 million (and the acquirer may also have committed a criminal offence).
* The NSI Act also gives powers to the Secretary of State to impose remedies to address risks to national security including the imposition of conditions (see below) or prohibiting or unwinding the relevant transaction.

Question 84

• A person with significant control over a company is an individual who meets one or more of the following conditions:

Answer 84

 The person holds, directly or indirectly, more than 25% of the shares in the company. This is calculated by reference to the nominal value of the shares;
 The person holds, directly or indirectly, more than 25% of the voting rights in the company;
 The person holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the company;
 The person otherwise has the right to exercise, or actually exercises, significant influence or control over the company;
 The person has the right to exercise, or actually exercises, significant influence or control over an arrangement such as a trust, which is not a legal entity but which meets any of the other specified conditions in relation to the company, or would do so if it were an individual.

Question 85

Tax implications on share sales?

Answer 85

• Corporate seller – potential liability to corporation tax on the chargeable gain arising on the sale of the shares.
• Individual seller – potential liability to capital gains tax (‘CGT’) on the chargeable gain arising on the sale of the shares.
• Once the chargeable gain has been calculated, taking into account any allowable expenditure and (in the case of a corporate seller) indexation allowance, and setting off any available losses, we need to consider the ways in which the tax liability on the chargeable gain may be reduced, deferred or even eliminated altogether.

Question 86

SSE

• Substantial Shareholding Exemption (SSE) applies when a company is selling shares in another company. In order for the seller to qualify for SSE, the following conditions must be satisfied:

Answer 86

 the selling company must have owned (as opposed to be disposing of) at least 10% of the ordinary share capital of the company whose shares are being sold, for at least 12 consecutive months in the 6 year period before disposal; and
 the company whose shares are being sold must be a trading company or the holding company of a trading group or sub-group, throughout the period from the beginning of the 12 month period mentioned above until the date of sale.
- If these conditions are satisfied, then any gain on the sale of the shares is not treated as a chargeable gain and therefore no corporation tax will be payable by the corporate seller as a result of the share sale. Equally, if a loss is made on the sale of the shares, this is not an allowable loss for corporation tax purposes.
- It is possible to apply to HMRC for advance non-statutory clearance that SSE will, or will not, apply to a proposed transaction.

Question 87

What is a trading company and when is it subtantial?

Answer 87

is a company carrying on trading activities which do not include to a substantial extent activities other than trading activities and trading group is defined along the same lines. Substantial in this context is interpreted as being more than 20%.

Question 88

What are Trading activities?

Answer 88

generally those carried on in the course of, or for the purposes of, or in preparation for, a trade carried on (or to be carried on) by a member of the group/subgroup. It generally excludes investment companies

Question 89

• BADR (known as Entrepreneur’s Relief for disposals before 6 April 2019) may apply to reduce the rate of CGT liability on a disposal of shares in a target company by an individual who is a higher or additional rate taxpayer where the following conditions are satisfied

Answer 89

· the target company must be a trading company (or holding company of a trading group);
· the individual disposing of the shares must be an officer or employee of the target company (or another company in the same group);
· the individual must hold at least 5% of the ordinary shares in the target company, carrying at least 5% of the voting rights;
· the individual must be entitled to at least 5% of:
 the profits that are available for distribution and assets on the winding up of the company; or
 the disposal proceeds if the company is sold; and
· all these conditions must have been satisfied for 2 years immediately prior to the disposal.
* The intention behind the conditions is to ensure that an individual has a genuine economic interest of at least 5% in a company in order to qualify for BADR.

Question 90

• Similarly, IR may apply to reduce the rate of CGT on a disposal of shares in a target company by an individual who is a higher or additional rate taxpayer where the following conditions are satisfied:

Answer 90

· the shares being disposed of are fully paid ordinary shares and were issued to the individual for cash consideration on or after 17 March 2016;
· the company is (and has been since the shares were issued), a trading company (or the holding company of a trading group);
· at the time of the issue of the shares, none of the company’s shares were listed on a recognised stock exchange;
· the shares being disposed of have been held by an individual for at least three years from April 2016 (and continuously since issue); and
· the individual (or any connected person) is not (nor at any time has been from the date of issue of the shares) an officer or employee of the company (or of any connected company).

Question 91

Money limit for claiming tax releif for CGT?

Answer 91

• The total amount of gains on which an individual may claim BADR during their lifetime is limited, currently to £1 million of cumulative gains. This is commonly referred to as the “lifetime limit”.
• There is also a lifetime limit on gains which may qualify for IR (currently £10 million). This is a separate lifetime limit from the lifetime limit for BADR (i.e. over their lifetime the individual may make claims for BADR totalling £1 million, AND claims for IR totalling £10 million).
• Unlike SSE, BADR and IR do not apply automatically when the conditions are satisfied, instead the individual seller must make a claim for it to apply to a particular disposal.

Question 92

• Suggested approach to tax?

Answer 92

 Is the scenario a share sale or business sale?
 Who is receiving the consideration / is the consideration prima facie chargeable to tax?
 What tax(es) will be payable?
 How is it / are they calculated? (Note that we have not generally asked you to perform calculations, however you still need to be aware of the key principles in relation to calculating the relevant tax).
 Are there any exemptions or reliefs? (i.e. how can any tax be mitigated / reduced / extinguished?).
 Apply any test(s) relevant to the exemptions or reliefs to the facts.
 Conclude whether the exemption or relief applies on the facts and what steps need to be taken or could be taken if the exemption or relief applies.
 If applicable, you need to
* Consider Buyer tax issues e.g. Stamp Duty on shares, SDLT on real property.

Question 93

You are acting for a company which is proposing to purchase all of the shares in a private limited company (‘Target’) for £20,000,000 (the ‘Acquisition’). The Target has one wholly-owned subsidiary which is a plc (‘Subsidiary’). The Acquisition will be financed by a loan from a bank. In return for the loan, the bank would like to take security from your client, the Target and the Subsidiary.
Which ONE of the following statements is CORRECT advice in connection with the security being requested from the bank?
* If the Target provides security to the bank at the time of the Acquisition, it will amount to unlawful financial assistance.
* If your client provides security to the bank at the time of the Acquisition, it will amount to unlawful financial assistance.
* All of the security can be given to the bank as none of the security amounts to unlawful financial assistance.
* If the Subsidiary provides security to the bank at the time of the Acquisition, it will amount to unlawful financial assistance.

Answer 93

• If the Subsidiary provides security to the bank at the time of the Acquisition, it will amount to unlawful financial assistance.

Correct - the Subsidiary is a PLC and therefore cannot give financial assistance in relation to the acquisition of shares in its parent.\

Question 94

Your firm has been instructed to act for a corporate client in connection with its proposed acquisition of shares in a private limited company (‘Target’). The Target has an issued share capital of 2,000 ordinary shares of £1 each and your client is proposing to buy 1,500 of the ordinary shares in the Target (the ‘Transaction’). Your client has asked for some preliminary advice in relation to the Transaction.
Which ONE of the following statements is CORRECT?
* The advice sought by the client in relation to the Transaction relates to investments of a specified kind and advising on the merits of such investments is a regulated activity for the purposes of the Financial Services and Markets Act 2000 (“FSMA”). Your firm will therefore need to ensure that they satisfy the conditions specified by s.327 FSMA.
* When providing advice to your client in connection with the Transaction, your firm will not be advising in relation to investments of a specified kind because the shares that the client is proposing to buy in the Transaction constitute 50% or more of the voting shares in the Target.
* When providing advice to the client in connection with the Transaction, your firm will not be carrying on an activity of a specified kind under FSMA because the shares that the client is proposing to buy in the Transaction constitute 50% or more of the voting shares in the Target.
* Your firm will be able to advise the client in connection with any part of the Transaction but only if all its advice is incidental to and complementary to other legal services that it is providing to the client.

Answer 94

• When providing advice to the client in connection with the Transaction, your firm will not be carrying on an activity of a specified kind under FSMA because the shares that the client is proposing to buy in the Transaction constitute 50% or more of the voting shares in the Target.

Correct - advising on this kind of acquisition of shares will be excluded activity under Art. 70 of the RAO

Question 95

You are acting for a corporate client in relation to the acquisition of the entire issued share capital in a private limited company (‘Target’). The Target is recognised as the UK market leader in the manufacture of football goalkeeping gloves. It has a 19% share of the UK market and has an annual turnover of £4 million. Your client has an 8% share of the UK market in the manufacture and sale of football kits (including goalkeeper apparel and gloves) and has an annual turnover of £40 million. Your client also operates in France and Germany. Your client has asked for advice on any competition law issues which may arise from the proposed transaction.
Which of the following statements is correct advice in relation to the competition issues which arise on the proposed transaction?
* The CMA is unlikely to investigate the proposed merger as the joint market share of the Target and your client is 27% which does not exceed the 30% market share threshold.
* The proposed acquisition between your client and the buyer will not be subject to review by the CMA as the turnover of the Target does not exceed £50 million.
* The parties need only be concerned about a possible investigation by the CMA if the CMA is notified of the proposed acquisition before it completes.
* If the proposed share sale is restructured as a business sale, the UK merger control regime would still apply to the acquisition of the business of the Target by your client.

Answer 95

• If the proposed share sale is restructured as a business sale, the UK merger control regime would still apply to the acquisition of the business of the Target by your client.

Correct. Potentially CMA applies where there is an acquisition of 100% of a company or a business.