Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Business Law & Practice > SGS 11: Acquisitions > Flashcards

SGS 11: Acquisitions Flashcards

1. advise a client, under supervision, as to the characteristics, advantages and disadvantages of structuring acquisitions as share sales and business sales respectively; 2. apply your knowledge of transaction structure and discuss the mechanics of both a share sale and an asset sale; 3. demonstrate an understanding of the purpose and contents of a typical Heads of Terms; and 4. demonstrate an understanding of the purpose and operation of the due diligence process. 5. demonstrate your unders

You may prefer our related Brainscape-certified flashcards:
MBE flashcards MPRE flashcards Civil Procedure 1L flashcards
1
Q

What is share sale?

A
  • Buyer purchases the issued share capital of the company.
  • The target company does not change
  • Continues to trade as it did prior to completion but with a new owner
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is asset sale?

A
  • Buyer purchases either the whole of the business as a going concern
  • Or if company has separate & distinct trading divisions within it, buyer purchases 1+ of trading divisions as a ‘going concern’.
  • Business trades as it did before completion. Each asset must be transferred separately and have part of the purchase price apportioned to it.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the ADVANTAGES of a share sale for the buyer? (over an asset sale)

A
  • Less Costly & Shorter Negotiations
    • …because no need to consider each asset
  • Continuity (less disruptive)
  • Less Complex
  • Quicker
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the DISADVANTAGES of a share sale over an asset sale for the buyer?

A

− Acquire risks & liabilities …Hidden liabilities
− More due diligence…Lengthy & More Costly
− Harder to value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the ADVANTAGES of a share sale for the SELLER?

A
  • Clean Break …sold free from liabilities (aside from warranties & undertakings)
  • Lower Tax …Only stamp duty on share transfer, which is cheaper than SDLT on asset sale
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the DISADVANTAGES of a share sale for the SELLER?

A

− Retain no business interest

− May face restrictive covenants

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the advantages of asset sales for the buyer?

A
  • Cherry pick best assets
    • …Not take on unwanted assets & liabilities
  • Avoid unknown liabilities
  • More accurate valuations
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the disadvantages of assets sales for the buyer?

A
  • Longer & Costlier negotiations
  • Less Continuity …Contracts with 3Ps & other aspects of business affected
  • More Complicated…Assets transfered separately
  • Consent Required …Assignment/novations – alert 3P to sale&raquo_space; disruptions
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are the advantages of asset sale for the seller?

A
  • Get rid of loss making/non-core division
  • …Carry on with rest of business
  • Keep ownership
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the disadvantages of asset sale for the seller?

A

− Keep liabilities/assets which are unwanted
− Consideration goes to selling company
…Passed to SH via dividend/winding up
− Tax disadvantages
…SDLT/stamp duty on land/assets. Taxed twice – CT & then IT when to members.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the 4 main characteristics of share sale?

A
  1. Seller is shareholders
  2. Sellers prefer this method
  3. Seller pays CT if a company/CGT if individual + made a gain
  4. Buyer ½% Stamp Duty on shares
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the 4 main characteristics of asset sale?

A
  1. Seller is company itself
  2. Buyers prefer this method
  3. Seller pays CT on gain
  4. Buyer – SDLT (if land transferred)/Stamp duty
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the 4 step procedure for carrying out a sale of shares?

A

i. Seller sign Stock Transfer Form
ii. Buyer pays stamp duty on consideration for shares
iii. Target company approves share transfer
iv. Buyer entered into register of members

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the 5 step process procedure for carrying out the sale of assets?

A
  1. TUPE – Employees automatically transfer to Buyer
    → Means that cannot restructure a deal to be an asset deal in order to leave all employees behind
  2. Contracts remain with Seller unless assigned/novated to the Buyer
    → Novation – tripartite agreement
    → Assignment – bipartite agreement
  3. Property remains with Seller unless transferred to Buyer using TR1
  4. Liabilities remain with Seller
  5. Warranties and/or indemnities also required
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the purpose of the heads of terms?

A
  • Key terms of transaction (also appear in SPA)as agreed in principle
  • Key steps parties have agreed they will/not take during negotiations
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Are heads of terms legally binding?

A
  • Largely not, with some binding provisions (contractual force) – boilerplate provisions (confidentiality, lock-out agreements, costs) where specified to be legally binding.
  • They have moral force, indicating serious intent & commitment.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

When are heads of terms used?

A
  • Beginning of the transaction – before significant costs are incurred
  • Often without the involvement of lawyers
18
Q

What is an exclusivity clause?

A
  • Protects buyer against wasted time & costs (Due Diligence etc.)
    Prevents seller negotiating/soliciting offers from other parties for fixed period
19
Q

What is the purpose of due diligence?

A
  • Fact finding mission for Buyer (because ‘caveat emptor’)
    Information&raquo_space; choice as to protections
    Especially important for a share sale because of liabilities being assumed
20
Q

What does the extent of due diligence depend on?

A
  • Structure of sale
  • Client instructions
  • Budget
  • Amount of consideration
  • Types of asset being purchased
21
Q

What are the key steps of due diligence?

A
  1. DD Questionnaire – Buyer sends to Seller
  2. Seller Response – Answer Qs or provide docs
  3. Further Q from Buyer
  4. Various DD Reports prepared for Buyer – ‘Full form’ or ‘Exceptions only’
  5. Purchase steps informed by above
22
Q

What is the retention account?

A
  • Where there is litigation – additional form of contractual protection
  • Part of the purchase price is put into a bank account opened in the joint names of the Seller and Buyer, pending the outcome of e.g. A litigation involving target company.
  • If resolved in target’s favour, then retention monies can be paid to Seller, but if not & target has to pay, then money is returned to Buyer.
23
Q

What are conditions precedent?

A
  • Used where consent, clearances or completion of specified documents is a prerequisite to Buyer entering into SPA. Reduction in Purchase Price if there is a known & quantifiable liability that target has to pay after completion.
24
Q

What is ‘financial assistance’?

A
  • Where there is an acquisition of shares and a company to which the prohibition applies gives financial assistance,
  • directly or indirectly, before or at the same time as the acquisition, for the purpose of the acquisition,
  • or after the acquisition
  • for the purpose of releasing or discharging a liability incurred for the acquisition.
25
Q

Explain the prohibition for financial assistance when the target is a public company?

A
  • Prohibition applies to – s678(1) and (3):
    • The target itself
    • Any subsidiary of the target, whether public or private
26
Q

Explain the prohibition for financial assistance when the target is a private company?

A
  • Prohibition applies to – s679(1) and (3):

- Any public company subsidiary of the target

27
Q

How can we work out if something is prohibited Financial Assistance?

A
  • Who is the target: is a prohibited company involved?
  • Is this prohibited company giving financial assistance: s677 definition
    • s677(1)(a) / s677(1)(b) / s677(1)(c)
    • Gift / guarantee / loan.
28
Q

Which factors need to be taken into consideration when assessing financial assistance?

A

Is it…

i. Direct or Indirect – buyer (direct) or bank lending to buyer (indirect)
ii. For the purpose of enabling acquisition – buyer able to buy without loan? Bank lent money w/o security?
iii. Before/at the same time/after the acquisition

29
Q

What are the exceptions to financial assistance?

A

a) Purpose Exceptions – s678 – s679 – Where the primary purpose was not for the purpose of the acquisition.
b) Unconditional Exceptions – s681(2) – E.g. dividend payments and share buybacks
c) Conditional Exceptions – s682(1) and (2) – Specific types of transaction which are exempt provided certain conditions are met. E.g. Money lending is in ordinary course of business.

Exceptions - s678, s679, s681(1) and (2)

30
Q

What are the consequences of a breach re prohibited financial assistance?

A

• s680 – Fine for company
• s680 – Officers fine/imprisonment. Transaction – may be void & possibly unenforceable (case law) i.e. the security and possibly the acquisition itself.
o If security/loan provision can be severed, then only that is deemed void & unenforceable rather than whole sale (Brady v Brady)

31
Q

What happens re prohibited financial assistance, if the 1985 Act applies instead?

A
  • Pre 01 October 2008 – More restrictive – even private companies couldn’t give FA but could legitimize by going through ‘whitewash’ procedure. Couldn’t be done retrospectively:
    − SR, Directors’ Salary Statement (DS), Auditors’ Report (AR)
    − Need to do due diligence checks
32
Q

Who is a share purchase agreement between?

A
  • Buyers and shareholders
33
Q

Who is an asset purchase agreement between?

A
  • Buyer and target company?
34
Q

What is the purpose of the share purchase agreement?

A
  • Document under which shares are bought and sold.

- Without the SPA buyer has little protection in Case Law / statute - caveat emptor

35
Q

What does the buyer want to be included in the share purchase agreement?

A
  • Warranties, Indemnities, Retention account (10% consideration monies kept aside),
  • Conditions precedent (e.g. 3P consent, Regulatory consent where target is in heavily regulated business).
  • Where possible try to avoid CPs at all costs!
36
Q

What does the seller want to be included in the share purchase agreement?

A
  • Clear break (no potential claims hanging over it)

- vendor protection clause

37
Q

What are warranties? What is their purpose?

A
  • They are statement of fact about target company (if wrong, sue for damages/contractual)
  • Purpose: Ensures that buyer knows current state of affairs of company
  • Forces seller to make appropriate checks/inform buyer via disclosure letter during negotiation – sharpens Seller’s investigation
38
Q

What does the disclosure letter do?

A

− Qualifies the warranties – e.g. Warranty states ‘not subject to any limitation’, but DL might state that ‘with one exception
− Contractual protection for seller – if disclose, can’t be sued

39
Q

What are indemnities?

A
  • Where the seller promises to reimburse buyer in relation to a specific liability
  • Stronger protection for the buyer
  • Buyer gets full reimbursement and if non-payment, then can claim debt
  • Never ‘for any claims’
  • This is rare – effectively a blank cheque
40
Q

What is vendor protection?

A
  • The time limits and financial limits

- For the breach of warranty claims

Business Law & Practice (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions