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LPC > Private Acquisitions > Flashcards

Private Acquisitions Flashcards

1
Q

Case and principle regarding Information Memorandums?

A

Smith New Court Securities Limited

Lawyers and financial advisers can be liable for fraudulent misrepresentation if they overstate the the degree of interest or terms offered by other bidders with a view to maximising competitive tension.

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2
Q

Case and principle regarding Lock In Agreements

A

Walford v Miles

House of Lords held that agreement to bind parties to negotiate in good faith was unenforceable due to uncertainty (Therefore need to use Lock-out)

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3
Q

Considering bids, case and principle?

A

Blackpool and Fylde Aero Club Ltd

Seller must consider bids submitted on time and in accordance with auction rules/procedures communicated to bidders.

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4
Q

Exit/ De-Grouping Charge Criteria and Effect
(6 points)

Share sale only.

A

Where a company has:

  1. Received a chargeable asset
  2. Resulting from Intra-group transfer (no gain/no loss)
  3. Leaves group within 6 years
  4. Deemed gain which the charge is calculated is MV at the time of the last intra-group transfer less the base value when the asset entered the group.
  5. Deemed gain added to consideration due in respect of shares - Seller is liable to pay but may avoid via SSE.
  6. Could also jointly elect with another Chargeable Gains Group under 171 TCGA company which has a capital loss.
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5
Q

What is the case and principle regarding court and restrictive covenants?

A

Trego v Hunt

The courts will not imply covenants by seller of a business that it will not set up competition once sold.

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6
Q

What is the case and principle regarding restrictive covenants and employee dismissal?

A

General Billposting Co Ltd

If an employer dismisses an employee in breach of the employment agreement, the employee is not bound by the restrictive covenants in the employment agreement.

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7
Q

Conditions for SDLT clawback?

A

1) Target has received land
2) As a result of Intra-group transfer
3) Leaves group within 3 years
4) Liability of the Target (indirect buyer concern)
5) Pay SDLT on the market value of the premises at the date of the intra group transfer.
6) Remedy - reduction in purchase price or an indemnity.

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8
Q

Case and principle regarding undervalue distributions?

A

Aveling Barford

Where a subsidiary transfers an asset as gift/ undervalue to a sister company, transfer is a deemed distribution in kind to the parent.

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9
Q

FSMA / FSA considerations on a Share Sale via Auction?

A
  1. General Prohibition, s.19(1)
  2. Financial Promotion, s21(1)
  3. Prospectus Test. s85(1)
  4. False / Misleading Statements, s89 FSA
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10
Q

Auction Sale Preliminary Documentation?

A
  1. Information Memorandum
  2. Process Letter
  3. Confidentiality Agreement
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11
Q

Private Treaty Sale Preliminary Documentation

A
  1. Heads of Terms
  2. Exclusivity Agreement
  3. Confidentiality Agreement
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12
Q

Acquisition Agreement - who prepares first draft?

A
  1. Auction - Seller

2. Private Treaty Sale - Buyer

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13
Q

FSMA General Prohibition (issue and exemptions)

A
  1. s.19
  2. Art 76 RAO - shares, investment
  3. Art 14 RAO, activity
  4. Art 70(2) RAO - More than 50% of voting rights in body corporate.
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14
Q

Restriction on Financial Promotion (issue and exemption)

A
  1. s.21 - no financial promotion unless authorised or contents approved.

Applies Info Memo

  1. Art 62(2) FPO - acquiring day to day control in body corporate.
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15
Q

Issue with prospectus on auction sale?

A
  1. s.85(1) - need if selling to public.

2. s.86(1) - no need if selling to fewer than 150 people or to qualified investors.

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16
Q

Additional consideration for listed company shareholders on auction sale?

A
  1. Disclosure - Disclosure and Transparency Rules.
    - Publicly disclose transaction if it could have significant effect on share price
    - Can delay if it won’t mislead the public and can be kept confidential
  2. Class Transactions - Listing Rules
    - RIS, Explanatory Circular and SH approval
    - Delay
  3. Related Party transactions
    - Only applicable if between listed co./sub and a director/substantial shareholder
    - RIS, Circular and SH approval
    - Delay
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17
Q

Other important matters on an auction sale?

A
  1. Data protection
  2. Competition Clearance
  3. Regulatory approval
  4. Financial Assistance
  5. Shareholder consents required?
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18
Q

Two ways of ensuring purchaser benefits from confidentiality?

A
  1. Make Target a party to the confidentiality agreement.
  2. The Third-party rights clause could contain a carve-out stating that the Target is to benefit form the undertakings ie. enforce the Contracts (Rights of Third Parties) Act 1999.
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19
Q

Why does Buyer need protection in an acquisition?

5 points

A

1) Principle of caveat emptor - Buyer beware
2) DD, warranties and indemnities needed
3) s.89 FSA - Dishonestly conceal or make misleading statements
4) s90 FSA - not create false or misleading impression
5) Provide comfort but only penalise the seller, no damages

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20
Q

Warranties? 3 points

A

1) Contractual statement of fact about a particular state of affairs of the company existing at the time the statement is made.
2) If untrue, claim for breach of contract with damages as the remedy (subject to mitigation and remoteness)
3) Purpose:
i) Flush out information about the target
ii) provide contractual recourse if false.

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21
Q

Indemnities? 4 points

A

1) A promise to reimburse the other party if a specific liability arises in the future
2) The indemnity will cover a liability which the buyer knows about before the sale
3) If the liability crystallises, £1 for £1 reimbursement which is not subject to contractual principles
4) The strength is only as a good as the person giving it - retention account if in doubt

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22
Q

Warranty exam question structure? PWH

A
  1. Purpose
  2. Why change?
  3. How change?
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23
Q

Protective provisions for buyer and seller?

A

Buyer (WIR):
W - Warranties
I - Indemnities
R - Restrictive Covenants

Seller (DAVE):
D - Disclose against warranties
A - Amend Scope
V - Vendor protection
E - Entire Agreement
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24
Q

When amending accounts - what is always the standard?

A

True and Fair, as per CA standard at 393 and only covers 1/2 years.

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25
Q

Purpose of “As far as the Seller is aware?”

A

1 Seller is trying to limit its liability in cases where it cannot be certain.

2) Its friendliness to a party depends of how it is defined
3) Buyer will want to add “having made reasonable enquiries
4) To limit exposure, Seller will want to add specific names appended to the agreement

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26
Q

Purpose of a Buyer’s knowledge clause?

A

1) Whether a Buyer can make a warranty claim even if
it had knowledge depends on Agreement (Infiniteland)
2) Seller would ideally delete/or state that Buyer cannot rely on matters which it had knowledge
3) Seller may agree but limited to constructive
and imputed knowledge [Not actual knowledge]

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27
Q

What is a tax Schedule/Deed/ Covenant?

A
  1. Contains tax related warranties, general indemnities (outstanding tax as at completion) and specific indemnities (arising from DD)
  2. Only relevant on share sale as it will become an indirect liability of the buyer (N/A on asset sale as liability left with seller)
    3) Exclusion for tax liability covered by completion accounts so as to prevent double recovery.
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28
Q

Traditional payment method of indemnities and the tax consequences? (and case)

A
  1. Indemnity paid to the target BUT
  2. Zim properties - target taxed on payment from seller as a Chose In action, a capital gain.
  3. Therefore, indemnity payments must be made directly to Buyer
  4. HMRC agrees this will treat payment as an adjustment to the consideration
    a) Buyer treated as paying less for T (lowering base cost)
    b) The consideration received by Seller is deemed to reduce by the value of the indemnity, reducing capital gains due (could get refund)
    c) No Stamp duty adjustment
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29
Q

Substantial Shareholding Exemption conditions?

3 points, 2 limbs and result.

A
  1. Share Sale
  2. Corporate Seller
  3. Any form of consideration (cash or paper)
  4. Selling Company must have owned at least 10% of the OSC of Target for at 12 consecutive months in the two year period before disposal; and
  5. Both Selling Company and Target must be trading companies/members of a trading group throughout the period from the start of the same 12 month period until immediately after the date of sale.
  6. Result = No chargeable gain will be deemed to arise therefore no CT payable.
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30
Q

Tax Deferral on Paper Consideration? (Conditions)

A

a) Applies to corporate + individual sellers
b) Tax on gain is deferred until shares are disposed/notes are redeemed
1) Buyer will hold more than 25% OSC in Target
2) Bona Fide reason for structuring via paper and not just for tax purposes (ie no cash finance available)
3) If loan notes, earliest redemption must be at least 6 months from sate of sale (otherwise HMRC will view as cash and tax accordingly)

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31
Q

Class Transactions percentages?

A

Class 1: 25% or more but less than 100%
Class 2: 5% or more but less than 25%

Gross Assets
Profits
Consideration
Gross Capital

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32
Q

Result of a class 1 transaction? (3)

A
  1. RIS must be notified with transaction details
  2. Explanatory circular (approved by FCA) sent to SHs
  3. Prior Shareholder approval via OR for transactions
    - Will cause delay

Class 2: RIS only.

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33
Q

Standard of disclosure necessary to qualify warranties?

A

Infiniteland: Depends on precise wording of Acquisition Agreement

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34
Q

Impact of “fair” disclosure? (3 cases)

A

Preferred by Buyer as raises threshold.

1) Levison - Sufficiently precise
2) Daniel Reeds Limited - Positive statement
3) New Hearts - Clearly Flagged, a mere reference to a source in a complex document is not satisfactory

35
Q

3 forms of property protection?

A
  1. Title Investigation
    - Best form
    - Most expensive and time (buyer solicitors)
    - No benefit from priority periods on pre-completion searches on a share sale.
    - Provide remedy against seller’s solicitor
  2. Seller’s solicitors’ certificate of title
    - Appropriate where Seller’s solicitor’s have carried out searches (ie bought recently)
    - Negotiating format can take time
    - Buyer’s Lender may insist regardless
    - Provide remedy against seller’s solicitor
  3. Warranties
    - Fast
    - Only as good as the company giving them
    - Recover under warranties are subject to contractual principles and vendor protection clauses
    - Only provide remedy after the transaction has completed
36
Q

7 Step Tax Issue structure for all questions!

A
  1. Share sale or asset sale
  2. Who is the Seller
  3. Seller a company or individual?
  4. Type of tax?
  5. Reliefs / exemptions?
  6. Conclusion?
  7. Buyer tax issues?
37
Q

What is Group Relief?

A

Trading Losses can be offset against income profits AND chargeable gains.

Two limb test to be part of same group for GR:

  1. Beneficial - Parent must own at least 75% of OSC of each sub (multiply % for next level subs)
  2. Economic - Parent must be entitled to at least 75% of the profits available for distribution and assets available for distribution on winding up.

If fails, see consortium relief.

38
Q

Consortium Relief?

A

Allows proportion of trading losses to be surrendered by the consortium owned co to the consortium members.

  1. Company must be owned by two or more companies but Group Relief criteria is not met.
  2. 75% OSC is owned by two or more companies (excluding fixed dividend shares with no right to participate in profits)
  3. Each company must hold at least 5%

Must members Relevant Fraction (lowest % assets on winding up, profits or shareholding)

  • Losses surrendered cannot exceed taxable profits.
  • Applies to
39
Q

Chargeable Gains Grouping?

A

Allows capital losses to be set off against capital gains but must be in same CG Grouping

  1. Beneficial - 75% subs and their 75%
  2. Economic - Effective 51% subsidiaries of the parent on profits and assets on winding up.
  3. Must jointly elect within 2 years from the end of the accounting period which the gain or loss relates.
40
Q

Advantages and Disadvantage of Auction for Seller? 5 and 7

A

+’s:

  1. Access to multiple buyers
  2. Maximise price - competitive tension
  3. Control disclosure and timetable
  4. Better terms more likely (draft AA)
  5. Easy to demonstrate to SH that best deal got.
  • ’s:
    1. Not appropriate for all companies (complex and limited markets)
    2. Risk of leak of confidential info
    3. Reputational damage if fails
    4. More expensive
    5. Greater management time
    6. Some Bidders only try to get competitive advantage
    7. Interrupts ordinary business
41
Q

Advantages and Disadvantage of Auction for Buyer? 4 and 6

A

+’s:

  1. Lower price if few or no other bidders
  2. May be quicker
  3. May be cheaper (seller drafts acquisition agreement)
  4. May obtain confidential info via VDR (unscrupulous)
  • ’s
    1. More expensive if price is driven up
    2. Wasted costs if do not win
    3. Lower chances of success
    4. If successful, Target may be affected by leaked info. 5. Worse terms as Seller drafts AA
    6. Less access to information and management team
42
Q

Buyer - Payment in the form of shares.

Advantages and Disadvantages (3 and 3)

A

+’s:

  1. Buyer does not have to raise cash
  2. Lower’s gearing ratio (debt v equity, making more attractive to Lenders
  3. No legal obligation to pay dividends
  • ’s:
    1. Dividend payments are not tax deductible (unlike interest on loans)
    2. Issuing shares may cause delay
    3. Issuing will dilute ownership, SH may not approve.
43
Q

Seller - Payment in the form of shares.

Advantages and Disadvantages (2 and 3)

A

+’s:

  1. Seller may benefit from dividend payments but also capital growth
  2. Tax deferral
  • ’s:
    1. Seller only receives cash to reinvest until shares are sold
    2. Risk of capital depreciation (if buyer goes insolvent - shares will be worthless)
    3. Dividends are not guaranteed (only entitled if declared)
    4. If private company - shares are hard to sell (only accept if listed co.)
    5. Commercially, may not want shares in Buyer
44
Q

Buyer - Payment in the form of loan notes.

Advantages and Disadvantages (3 and 3)

A

+’s:

  1. Buyer has more time to raise cash - cashflow
  2. Buyer may be able to set off any claim it has against the Seller under W&I in the agreement
  3. Interest payments are tax deductible
  • ’s:
    1. Contractually obliged to make interest payments (but these are tax deductible)
    2. Will have to raise cash eventually
    3. Increases gearing
45
Q

Seller - Payment in the form of loan notes.

Advantages and Disadvantages (2 and 3)

A

+’s:

  1. Will receive interest payments
  2. Tax deferral
  • ’s:
    1. Risk if buyer goes into financial difficulties and is unable to redeem (take security)
    2. Delayed receipt of cash
    3. Possibility of set off by Buyer.
46
Q

Apportionment of consideration monies and the resulting Balancing charge/ allowance? (4 points)

Only relevant to business sale.

A
  1. Seller will want no more than an amount equal to the TWDV apportioned to the machinery, Buyer will want as high as possible so as to benefit from capital allowances.
  2. If machinery is sold for more than TWDV - Seller incurs balancing charge which will be added to taxable profit (difference between TWDV and sale price of asset.
  3. If sold for less - Seller will get a balancing allowance which will be deducted from taxable profit.
  4. Must notify HMRC via s.198 election othwerwise the Buyer’s qualifying expenditure for capital purposes will be zero.
47
Q

Mitigating chargeable gains on the sale of a business -
Rollover on Replacement Business Assets Relief?

[6 points]

A
  1. Where a qualifying asset is disposed of and replaced with another qualifying asset within the specified period (12 months before, 3 years after disposal)
  2. The gain from the disposal is carried forward and rolled into cost of a qualifying replacement asset
  3. The acquisition cost is reduced by the amount rolled over.
  4. Tax is postponed until replacement asset is sold and no new replacement is purchased - can be indefinite
  5. S is unlikely to buy new assets, but can rolled over into the cost of qualifying assets of Chargeable Gains Group members
  6. Includes property and Goodwill (not shares)
48
Q

VAT issues for Buyer on sale of a business?

[share sale is exempt]

A
  1. A ‘taxable person’ making taxable supplies of goods or services must charge VAT to the recipient and account for this VAT to HMRC.
  2. Art 5 Vat Order Exception, a transfer if a business will fall outside the scope of VAT purposes. Must be:#
    i) Transfer of a business as a going concern
    ii) Business assets must be used by the Buyer in the same kind of business with no significant break
    iii) Buyer must be VAT registered.
    3) If not satisfied, Seller would have to account to HMRC.
    4) Price deemed inclusive of VAT if silent (Seller pays)
49
Q

3 Seller protections from VAT in AA?

A
  1. Consideration is EXCLUSIVE of VAT.
    2) Include undertaking by Buyer to pay any VAT deemed payable to HMRC
    3) Confirmation that Buyer will comply with Art 5 conditions
50
Q

VAT in a scenario where property has a lease where VAT is charged?

A
  1. If S is charging VAT, it has waived exemption and opted to Tax.
  2. To comply with Art 5, Buyer must also elect to waive exemption and to tax
  3. If no, VAT may become payable on the consideration apportioned to the property.
51
Q

What are stamp taxes payable on?

A
  1. Payable on stock transfer form used to transfer the target’s shares at 0.5% of the consideration apportioned to the shares rounded to nearest £5
  2. Payable within 30 days.
52
Q

What is SDLT payable on?

A
  1. Properties (Form SDLT 1)

2. Payable within 30 days

53
Q

When does a cash sell occur and two options for Seller?

A

When a Seller disposes of business and all assets.

  1. Wind up company to receive money by way of distribution on a solvent winding up.
  2. Declare dividend to extract all cash and leave as shell.
54
Q

Two Buyer concerns with a Cash Shell and 3 solutions?

A
  1. Warranties and Indemnities are only useful if Seller has sufficient assets.
  2. Restrictive covenants are worthless if Seller has no longer exists or has no assets - may be threat from other group companies.

Remedies

  1. Seller’s SH a party to agreement as guarantor
  2. Seller’s SH gives RCs and procures that subs will comply;
  3. Retention account to hold portion of consideration
55
Q

Duty to Inform and Consult under TUPE (8 Points)

A
  1. Reg 3(1) - Applies to a Relevant Transfer - sale of a business.
  2. 13 - Duty to inform Representatives affected by the transfer - always employees.
  3. Must consult where there are measures planned - interpreted broadly and would include relocation or redundancy.
  4. Must communicate to Union Rep, or appoint employee rep.
  5. Must take place before the transfer (normally the Seller)
  6. 15 - Joint and several liability for Buyer and Seller - Buyer will want warranty that duty has been complied with and an indemnity otherwise.
  7. 16 - Consequence is 13 weeks pay per employee if found by Employment Tribunal.
  8. 13A - Micro businesses of fewer than 10 can communicate directly if there is no reps.
56
Q

Buyer wishing to change employee terms after transfer?

UETPIC

A
  1. Why - to harmonise with current employees.
  2. Reg 4(4) - Void if sole or principal reason for variation is the transfer
  3. Exceptions when variations may be allowed with employee consent:
    i) Unrelated
    ii) ETO reason
    iii) Terms allow (must not have inserted for sole or principal)
    iv) Entirely Positive for employee
    v) Insolvency Proceedings
    vi) Collective Agreements
57
Q

Consequences for Buyer changing terms after transfer without valid exception?

A
  1. Void, even if employee consented
  2. Fundamental breach, employee can resign and be treated as constructively dismissed (claim for wrongful + unfair dismissal)
  3. Can’t enforce RCs
  4. No guaranteed period where changes will not be deemed connected to transfer but should wait until organisation wide salary review or binding settlement agreement then give new employment contract.
58
Q

Treatment of Freelancers re. transfer?

A
  1. TUPE only applies to employees, not self-employed or consultants
  2. Must be transferred via novation or enter into new contracts (Tolhurst - cannot assign benefit of a personal service contract)
  3. Use cross-indemnities if unsure of status re. employee list of employees:
    Generally not contentious due to 3 month limit to bring to tribunal
59
Q

Treatment of transferring Shared Employees?

A
  1. Reg 4 - Employees who were employed immediately before the transfer and assigned to the undertaking being transferred WILL transfer
  2. Cases of Botzen and Duncan - guidance on assigned. Depends on the employee’s function rather than terms of contract.
  3. Tribunal will try to ascertain who the actual employer is by looking at:
    i) Time spent working in each business
    ii) Amount of value given to each business
    iii) Contractual terms indicating how the employee is assigned; and
    iv) cost of the employee is allocated
60
Q

Cross-indemnities given in relation to shared employees?

A

1) Parties agree list of employees who they believe will transfer under TUPE
2) Parties can apportion financial risk of the legal position not being the same by giving indemnities to each other

These are:

i) If left off the list and transfers - the Seller will indemnify
ii) If on list and does not transfer - the Buyer will indemnify
iii) If on the list, the buyer will pick up liability for liabilities arising post-completion.
iv) Employee list - Seller will be liable for pre-completion acts.

61
Q

3 ways of dealing with the transfer of debtors?

A
  1. Stay with Seller (Common)
    - May pursue to vigorously and hurt reputation
    - Perhaps undertaking that Seller will not issue proceedings to recover debts until after a certain period after completion + allow buyer to buy after
  2. Stay with Seller but collected by Buyer as Agent
    - Seller bears risk but comfort to Buyer to manage
    - Buyer may request fee to and for Seller to repay expenses
  3. Transfer to Buyer
    - Debts detailed in AA
    - Transfer via legal assignment (written notice to each debtor)
    - Risk to buyer if debts are unrecoverable (may seek discount)
62
Q

Transfer of contracts? 3 methods

A
  1. Assign
    - Can only assign benefit
    - Buyer gives undertaking to perform burden on the Seller’s behalf and gives an indemnity in case it fails to do so.
    - Check for non-assignment clause.
  2. Novation
    - Tri-partite agreement where the Buyer steps into shoes of the Seller and seller is released from all obligations
  3. New contract
63
Q

How are secondary third-party contracts transferred?

A

A clause in the asset sale agreement will state:
o The seller will be paid by the third party and must hold that money on trust for the buyer
o The buyer will provide the services to the third party on the seller’s behalf
o If the buyer fails to perform these obligations, it will indemnify the seller in relation to any action the third party brings against the seller (As the burden cannot be assigned)
o The seller must use its best (seller may want ‘reasonable’) endeavours to procure the novation/assignment of these contracts after completion

64
Q

Types of pension schemes?

A
  1. Personal Pension Schemes
    - Between individual and pension fund
    - Always defined contribution
    - All rights and liabilities transfer
  2. Occupational Pension Schemes
    - Set up and run by employer
    - Can be defined contribution or defined benefit (from employee’s perspective - a fixed % of the final salary on retirement and also a number of the years worked. Employer will have to pay balance on annuity).
    - Do not transfer but subject to TUPE.
65
Q

Transfer of Pension liabilities on an Asset Sale?

A

Personal Pension Schemes

  • Transfer under Reg 10
  • Buyer has to honour what is in employee contract

Occupational Pension Scheme

  • Employees transfer automatically under TUPE
  • Under Reg 10, occupational pensions do not transfer
  • Under Transfer of Employment 2005 Regs - Buyer must offer a pension provision of its choice to previously entitled employees:
    i) Defined Benefit
    ii) Defined Contribution
    iii) Stakeholder Scheme
66
Q

s.75 pension liability issues?

A
  1. Only relevant on share sale as target will leave group
  2. Applies where target participated in a group occupational pension scheme and is leaving corporate group and will cease participating in scheme.
  3. Issue if scheme is a final salary scheme in deficit (value of assets do not cover accrued liabilities)
  4. s.75 Pensions Act 1995 - a company that ceases participating is liable for portion of deficit .
  5. Buyer will seek indemnity but even this may be insufficient (potentially walk away)

[Only an issue for Buyer on a share sale as will indirectly arise in the Target]

67
Q

Environmental Liability concerns?

A
  • Local authorities serve contaminated land notices
  • Serve a remediation notice on Class A or Class B persons
  • Class A: those who caused or knowingly permitted cont. substances on the land
  • Class B: If no class A can be found, liability passes to current owner and occupier.
  • Civil offence but criminality for Class A
68
Q

Environmental Share Sale or Asset Sale concerns AND solutions

A

Share Sale
- Buyer concern that any liability arising will reduce value of Target

Asset Sale
- Buyer will become owner/occupier and so potentially incur Class B liability [having knowledge or paying reduced PP could increased liability]

Solutions:

  1. Ask Seller for more Information - commission a environmental report (Phase I or II)
  2. Ask Seller to clean up
  3. Ask for indemnity w/guarantee
  4. Walk away
69
Q

Advantages and Disadvantages for management participation in an MBO?

A

+’s:

  1. Ordinary shares will allow participation in dividends and capital growth on exit
  2. Greater control over direction of the business
  3. Managers will be incentivised to grow business
  4. PE investors bring expertise
  • ’s:
    1. Risky as large portion of personal wealth invested (may have to re-mortgage home)
    2. Terms of Investment Agreement will exert PE’s control so influence restricted - eg chairman
  • Veto rights and restrictions
    3. Management Liability for breach of warranty in investment agreement
    4. Commitment to stay with for a period of time.
70
Q

What is a ratchet?

A
  • Allows PEF is sufficiently motivated to work hard for transaction to succeed.
  • MT take a % of equity
  • The financing of the deal will be structured to give the MT a return depending on the profit level achieved by Target
  • Proportion of shares changes (not number)
  • Included in IA and potentially articles of NewCo1.
  • Calculation:
    Shares / exit %, times by PEF exit %.
71
Q

Advice to directors re. MBO?

A

Arise when directors are same for Seller and NewCo2

  1. Confidentiality obligations in employment contracts when trying to secure PE finance.
  2. Director’s duties:
    - 172: Promote success of the company (warranty coverage and purchase price)
    - 174: Reasonable care, skill and diligence (side letters with Seller setting out how much time they can spend on MBO)
    - 177: Duty to declare interest in proposed transaction (Can vote if MA14 is removed)
  3. Non-conflicted directors should represent the company in negotiations
72
Q

Why is the BVCA MOU important?

A
  1. If shares are not issued in accordance, risk that HMRC will treat shares allotted to MT as disguised employment income and will tax as income.
  2. MT will want to avoid this tax on their shares of NewCo1 as income tax is higher than capital gains tax
  3. HMRC has accepted that if the conditions in the BVCA MOU are met, the shares will be taxed as Capital Gains.
73
Q

7 Steps for BVCA? OPSF 3 ratchet

A
  1. MT shares must be Ordinary Shares
  2. PEF preference shares must be on commercial terms
  3. MT must acquire shares at the same time as PEF
  4. MT must be fully remunerated through salary and bonuses
  5. Ratchet must be linked to performance of company (not individual)
  6. Ratchet provisions must exist when PEF acquires shares
  7. Ratchet must be downward only,
74
Q

4 conditions for to allow management to set off interest payments against income tax?

A
  1. Loan to an individual which is applied in acquiring ordinary shares.
  2. At the time ordinary shares are acquired, company must be a close company (controlled by five or fewer participators ie. over 50% OR by shareholders all whom must be directors.
    - avoided by structuring of NewCo1
    - MT invest nominal amount and are allotted shares, prior to PEFs. This allows close company criteria to be met.
    - Can then obtain loan and subscribe for further shares and PEF can then also subscribe (will no longer be close company)
  3. The company must exist to carry on a commercial trade.
  4. Throughout the period,the individual must either have owned shares in the company and worked for the greater part of his time in actual management or hold a material interest (broadly 5%) in the company.
75
Q

Preference shares vs loan notes and Transfer pricing rules?

A
  1. Interest on loan notes is tax deductible
  2. Deductibility restricted under Transfer Pricing rules
  3. The interest paid must not be more than what would be paid to an unconnected third party. acting at arms length.
  4. To avoid uncertainty, obtain evidence of an offer from a third party at a similar rate.
76
Q

Competition Control UK - 6 points

A
  1. Applies to share and asset sales.
  2. CMA has power to block merger.
  3. Thresholds are:
    - Turnover of Target exceeds 70M or
    - Merged entity will have 25% market share
  4. No general requirement to notify
  5. Can apply for informal advice or voluntary statutory pre-notification
  6. Investigation Phase I and Phase II
77
Q

Two phases of CMA investigation?

A

Phase 1

  • 40 working days
  • Unconditional clearance / clearance subject to legally binding undertakings / referral to Phase II.

Phase 2:

  • 24 weeks with possible 8 week extension
  • Cannot acquire further shares in target or integrate business
  • Same outcome but can prohibit
78
Q

Process Letter? 4 points

A
  1. Sets out process of Auction
  2. Amounts to invitation to treat
  3. Sent out once confidentiality agreements are signed
  4. Contains Info Memo

Asks about:
Finance
Structure
Market share

Buyer returns indicative bid.

79
Q

Why is personal data anonymised?

A
  1. So as to fall outside scope of DPA
  2. Otherwise would constitute personal data - needs processed certain way and affected individuals need to be informed as to why their data is being transferred to the Bidders.
80
Q

Rules of restrictive covenants?

A

Generally unenforceable but can be if they protect and legitimate busines interest and only go as far as necessary to protect such interest.

Must be reasonable in:
Duration
Business and Geographic Scope

81
Q

Entrepreneurs’ Relief?

A

Reduces capital gains from 20% to 10%. To qualify:

  1. Shares in a trading company
  2. Held shares for 12 months before sale
  3. Officer of the company holding at least 5% of ordinary voting shares.
  4. Must not have used £10 million lifetime allowance.
82
Q

Pre-sale dividend for individual? 6 points

A
  1. Charged as dividend income
  2. Will reduce consideration and Capital gains due BUT increase dividend income tax
  3. To compare, look at income tax on dividend vs how much capital gains will be saved by reducing gains on share sale
  4. Dividend allowance of £2000 at 0%.
  5. Likely to be higher rate tax band - dividend taxed at over 30% vs CGT of 20%
  6. Only efficient if basic rate payer but always use allowance.
83
Q

Why is a pre-sale dividend good even if corporate SH benefits for SSE?

A

Reduces price of target - making it more marketable.

84
Q

5 pension warranties?

A
  1. All pension schemes have been stated
  2. Full details provided
  3. Sufficiently funded
  4. Actuarial report provided
  5. Registered with HMRC

LPC (8 decks)

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