Session Two: Starting a Business

Question 1

M&A - Why?

Answer 1

M&A industry is one of the largest parts of financial and legal services

In theory, M&A is good for
– Private Owners: leave a “way out” of their business
– Economic efficiency: threat of takeover = spur to efficient management
– Innovation: quick way for successful new entrants to “scale up”

BUT can be bad for
– economic efficiency and owners if transaction costs exceed efficiency gain
– workers: who are often the focus of efficiency measures

Question 2

M&A - what?

Answer 2

mergers and acquisitions – private acquisitions

You want CONTROL, 3 basic scenarios
– acquisition of a controlling shareholding in your target
– acquisition of the target business as a going concern
– acquisition of (key) business assets (including IPR)

Question 3

M&A - share purchases

Answer 3

Usually by simple contract BUT
– Pre-emption rights may exist: other shareholders may have a ‘right of refusal’
– hare may not be transferable without the permission of the company (rare)
– different classes of shares (voting/non-voting, preference/normal)

Question 4

Now you have 51% of shares, now what?

Answer 4

• are you required to make a ‘fair’ offer to the minority? Do you have the right?
• registration of new ownership
• appointment of new directors? “poison pill” issues (i.e. golden goodbyes, long-term contracts of employment)

Question 5

M&A - buying business assets as a going concern or not

Answer 5

Buying an unincorporated business as a going concern
- from a partnership or where only part of a business is being sold
- but NOT when buying a subsidiary

‘Going Concern’ = assets include the customer connection
- BUT also need to make sure you get ownership/control of all other assets needed to run the business
- special issues around intangible assets

A Simple asset purchase
- does not give control of the business, but it may be crucial to carrying it on

Question 6

M&A - due diligence - Buying Shares

Answer 6

• minority stake: relatively simple checks
• majority stake: need to do some work to check the accounts of businesses accurately reflect the state of it

Question 7

M&A - due diligence - Buying Assets

Answer 7

• tangible assets: inspect and check ownership, warrantied and representations
• intangible assets: goodwill (warranties and check records), IPRs (are they registered? If not, non-compete clauses)

Question 8

Joint Ventures

Answer 8

JVs are common for new projects, like R&D or manufacturing, or new marketing ventures

Two Basic Kinds

1. Corporate JV
   – the new venture is run through a separate legal person
   – most used where the JV needs to own its own asserts to function properly
2. Contractual JV
   – a contract sets out the terms of the venture between the parents
   – more used for JVs where the purpose is to create new intangible property

Question 9

The JV agreement - why have one?

Answer 9

Both kinds of JV (corporate and contractual) needs a JV agreement, perhaps less detail in the corporate JV as some will be in memorandum

JVA needs to protect both parties’ interests, particularly if they have different contributions

MUST include
- governance of JV
- financing of JV
- management of JV
- results of JV
- restrictions of JV

Question 10

JVs and Third Parties

Answer 10

If there is a JVo it is a separate person with limited liability
- tax: especially if profits are distributed as dividends
- loans: parent company guarentees

A contractual JV will not have its own assets or liabilities
- both parents may be liable for its debts
- its profits will belong to the parents for tax purposes
- suppliers will have to contract with one or both of the parents
- employees will be employed by one of the parents