SGS 2 (Due Diligence)

Question 1

What should you consider when presented with service contracts?

Answer 1

That restrictive covenants are enforceable

transitional service agreement to preserve key director’s know-how if they are due to leave on the sale to ensure they remain for a handover period (e.g. 6 months)

Are documents correctly executed?

Question 2

What should be checked in relation to Freelancer staff letters?

Answer 2

Data protection issues, anonymise names, addresses in data room to ensure falls outside Data Protection Act 2018.

ERA 1996 - are the minimum notice periods complied with? If less, statutory minimum will prevail.

Question 3

What are the minimum notice periods under the ERA 1996?

Answer 3

One week’s notice after one month’s service, then one weeks for every completed year of service if period of continuous employment is 2+ years up to maximum of 12 years.

Question 4

What is the risk for a potential claim from HMRC that employees have been incorrectly labelled independent contractors?

Solution?

Answer 4

PAYE claims

Expense for Target if freelancers are deemed employees going forward.

Indemnity in respect fo potential PAYE claims (unlikely to get one in respect of increased costs going forward)

Question 5

What should you do if presented with expired TMs?

Answer 5

Evaluate their importance to the business.
Register / renewal steps.
Buyer gets indemnity to proceed against risk someones has registered same TM in the meantime.

Question 6

What can you do if a customer contract contains a prohibition on change of control?

Answer 6

Try to obtain a waiver

don’t get it as a CP as puts customer in strong bargaining position

Question 7

What should you consider if you come across a charge by way of legal mortgage?

Answer 7

Check loan agreement and the events of default contained within it.

Question 8

What step should you take if the Target has cross guarantees with other Group companies?

Answer 8

Get a deed of release from the bank.

Question 9

If there has been an intra group transfer what potential issue could arise and how can the buyer protect against it?

Answer 9

Clawback of SDLT (transferee, Target liable)
- Get a reduction in purchase price or indemnity.

Degrouping charge (of concern to the Seller not the buyer)

Question 10

What should you do if you discover that there has been an intra group transfer at an undervalue within the group?

Answer 10

Aveling Barford - transfer of capital asset to sister co at less than market value = deemed distribution.

Request accounts (check transferor had sufficient distributable profits at time of transfer)

Indemnity if insufficient distributable profits.

Question 11

Aveling Barford?

Answer 11

one subsidiary transferring an assets as a gift or undervalue to a sister company. Amount of undervalue = deemed distribution.

Need SH approval by OR provided it was made out of distributable profits

Question 12

When is an asset transferred within the group at an undervalue illegal?

Answer 12

If not made out of distributable profits (s.830 CA 06)

Question 13

What is the potential risk with an illegal transfer within the group at an undervalue?

Answer 13

Transferee may hold asset transferred as constructive trustee for transferor.

Buyer should get an indemnity from LTC properties. LTC has a claim for the amount of an undervalue

Question 14

What are the two relevant tests for competition purposes?

Answer 14

Need estimate of bidder’s current market shares.

‘Relevant merger situation tests”

Target turnover in UK exceeds £70m
OR
Merged entity has at least 25% market share.

Question 15

When does clawback operate?

Answer 15

Intra stamp tax grip transfer of land, if transferee leaves group within 3 years of receipt will need to pay SDLT

Question 16

De grouping charge rules?

Answer 16

If there is an intra group transfer of a chargeable asset and leave group within six years (falls on seller).

Question 17

When can guarantees crop up in acquisitions?

Answer 17

If subsidiary is selling its business - selling co’s ultimate parent co may join AA to guarantee subsidiary’s performance under warranties and indemnities.

If newly-formed company is the buyer, seller may request buyer’s parent co guarantees payment obligations (esp if deferred consideration)

Question 18

What is a distribution?

Consequences of illegal distribution?

Answer 18

s.829 CA, distribution of company’s assets to its members (e.g. parent co as a SH).

directors who authorised it will be jointly and severally liable to repay the company.