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
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
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.
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
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
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
6
Q
What are the DISADVANTAGES of a share sale for the SELLER?
A
− Retain no business interest
− May face restrictive covenants
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
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»_space; disruptions
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
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.
11
Q
What are the 4 main characteristics of share sale?
A
- Seller is shareholders
- Sellers prefer this method
- Seller pays CT if a company/CGT if individual + made a gain
- Buyer ½% Stamp Duty on shares
12
Q
What are the 4 main characteristics of asset sale?
A
- Seller is company itself
- Buyers prefer this method
- Seller pays CT on gain
- Buyer – SDLT (if land transferred)/Stamp duty
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
14
Q
What is the 5 step process procedure for carrying out the sale of assets?
A
- TUPE – Employees automatically transfer to Buyer
→ Means that cannot restructure a deal to be an asset deal in order to leave all employees behind - Contracts remain with Seller unless assigned/novated to the Buyer
→ Novation – tripartite agreement
→ Assignment – bipartite agreement - Property remains with Seller unless transferred to Buyer using TR1
- Liabilities remain with Seller
- Warranties and/or indemnities also required
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
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.
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»_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
- DD Questionnaire – Buyer sends to Seller
- Seller Response – Answer Qs or provide docs
- Further Q from Buyer
- Various DD Reports prepared for Buyer – ‘Full form’ or ‘Exceptions only’
- 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
Explain the prohibition for financial assistance when the target is a public company?
- Prohibition applies to – s678(1) and (3):
- The target itself
- Any subsidiary of the target, whether public or private
26
Explain the prohibition for financial assistance when the target is a private company?
- Prohibition applies to – s679(1) and (3):
| - Any public company subsidiary of the target
27
How can we work out if something is prohibited Financial Assistance?
- 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
Which factors need to be taken into consideration when assessing financial assistance?
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
What are the exceptions to financial assistance?
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
What are the consequences of a breach re prohibited financial assistance?
• 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
What happens re prohibited financial assistance, if the 1985 Act applies instead?
- 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
Who is a share purchase agreement between?
- Buyers and shareholders
33
Who is an asset purchase agreement between?
- Buyer and target company?
34
What is the purpose of the share purchase agreement?
- Document under which shares are bought and sold.
| - Without the SPA buyer has little protection in Case Law / statute - caveat emptor
35
What does the buyer want to be included in the share purchase agreement?
- 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
What does the seller want to be included in the share purchase agreement?
- Clear break (no potential claims hanging over it)
| - vendor protection clause
37
What are warranties? What is their purpose?
- 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
What does the disclosure letter do?
− 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
What are indemnities?
- 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
What is vendor protection?
- The time limits and financial limits
| - For the breach of warranty claims
