This guide sets out some of the issues that are likely to be encountered during the course of the negotiations leading up to and following completion of an acquisition or disposal of a business.
Preliminary Considerations
Shares or assets?
The structure of the transaction will need to be settled at the outset. Both structures have their advantages and disadvantages. Principal characteristics include:
| Extent of acquisition | Recipient of funds | Liabilities | Post completion | |
| Acquisition/disposal of shares | Every part of the business is transferred | Shareholders | All liabilities transfer | Reduced number of residual issues |
| Acquisition/disposal of assets | Specific items are transferred | Owners of assets | Reduced scope for transfer of liabilities | Seller may still need to deal with residual issues |
Naturally, each structure will have its own tax implications. Specialist tax advice should be taken at an early stage. We are able to help in structuring a transaction.
Heads of Terms
Heads of terms set out the key terms of the proposed transaction and enable advisers to prepare documents in accordance with those key terms. There is a fine balance between setting out outline terms and preparing detailed drafting of the contract. Heads of terms provide clarity, lay the foundations of the transaction and therefore save significant costs.
Confidentiality
Information will be exchanged between the parties (particularly by the seller) prior to any binding contract for sale. It may be appropriate for a binding agreement to be put in place at an early stage to give the parties confidence that the information shared will be used for proper purposes during and after any negotiations.
Exclusivity
A buyer will necessarily devote significant time and cost in investigating and negotiating a deal. In a competitive or high value context, a buyer may require a period of exclusivity to give it the confidence of committing to the transaction without fear of another party getting involved. The period of exclusivity may come at a price.
Financing
The more creative the payment mechanism, the more thought should go into the heads of terms. If not paying in cash on completion, loan notes, equity, instalment options, post completion adjustments and other mechanisms will have a role to play (together with remedies for any breach).
Depending on the agreed structure, tax clearances may be required. Your accountant will be able to give an idea of the timetable for obtaining such a clearance.
Conditional exchange
Consideration should be given to the completion timetable and whether a period of time between exchange and completion is required. Typically, a gap is required where conditions need to be met (such as obtaining certain consents) in order for completion to take place.
Employment
If the business is transferring to a new employer via an asset acquisition, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (known commonly as TUPE) will apply. As a result, the buyer will inherit all the rights and liabilities of the work force. In addition, TUPE requires a proper consultation with the employees regarding the disposal in advance of it taking place.
Where continuity for key customers will be important to the continuing success of the business, there may be advantages to both buyer and seller for the seller to continue working within the business for a period after completion.
Conversely, the buyer may require the seller to refrain from competing with the continuing business; the scope of restrictive covenants (to protect the legitimate business interests of the buyer) will need to be agreed.
Due diligence and disclosure
Due diligence undertaken by a buyer is standard (caveat emptor – buyer beware). A well advised buyer will wish to engage advisors (not just legal) to make enquiries. It is an information gathering exercise to enable specific drafting on specific points. The due diligence can assist in establishing the value of the transaction and put the parties on notice of any material issues.
If an issue is so significant that a buyer cannot take the risk on it, it may require an indemnity from the seller.
The purchase contract will invariably include statements of fact (known as warranties) to be confirmed by the seller. If a fact turns out to be untrue, the relevant warranty provides a remedy to the buyer (to recover some of the purchase price) and as such, warranties place the risk on sellers. If the seller is not comfortable with the statement it must disclose the reason.
The seller’s disclosures are contained in a disclosure letter. The disclosures allow the buyer an opportunity to assess whether to accept the disclosure (and risk), to seek further information, to renegotiate the price (if significant) or reject the disclosure (and put the risk back on the seller).
In the event of a claim, the disclosure letter would be used as a defence by the seller. A well advised seller will also seek to impose limitations on claims.
Warranties, indemnities, disclosure and limitations on claims are frequently heavily negotiated.
Documents
The principal legal document will be the acquisition agreement. It will refer to other documents and actions required to effect the transaction.
Completion
It is not unusual for the parties not to be under any binding legal obligation to each other until an exchange of contracts has taken place. In the majority of circumstances, completion follows in accordance with the terms of the exchanged agreement. On completion, the consideration is usually paid in return for the ownership of the asset(s).
Any security over the assets (by banks or others) will need to be dealt with. A buyer will invariably require the assets to be free of any mortgage or charge on completion.
A seller will wish to have any personal guarantees released.
Post-Completion
Registrations will be likely to perfect the acquisition including:
- Registering any property interests with Land Registry;
- Registering (or updating registrations) with any regulatory bodies;
- Completing filings with Companies House (if applicable);
- Arranging bank mandates;
- Arranging payment of any stamp duty or stamp duty land tax and any other tax payments.
On some occasions, the true value of the business cannot be accurately ascertained in advance of completion. Additional work will be required where accounts need to be drawn up to the date of actual completion so that any post completion payment adjustments can be made.
Other considerations
Having acquired or sold the business, both buyer and seller should consider:
- reviewing wills and powers of attorney;
- banking arrangements; or
- updating the company books.
Buyers will also wish to consider:
- revised shareholders’ agreement, partnership agreement or changes to the company’s articles of association;
- company secretarial arrangements; or
- changes to the business structure.
We would be pleased to assist you on any or all of the various aspects of your transaction. Please contact us on corporate.cornwall@stephens-scown.co.uk or 01872 265100.
This note has been prepared as an introductory guide only and should not be relied upon in the absence of bespoke and detailed advice.