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BPP University College Of Professional Studies Limited (BPP)
BPP University College Of Professional Studies Limited
Private Acquisitions
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PRIVATE ACQUISITIONS
1 x 3 hour exam – MCQ (15 marks) and long form (85 Marks)
KEY POINTS:
Purchase of a company by means of a share sale vs purchase
of a business by means of an asset sale.
Private treaty sale vs auction sale.
Possible split exchange and completion where, for example,
there is a requirement to obtain certain external consents.
Difference between a share sale vs. asset sale
Share Sale: If a buyer buys a company by means of a share sale The legal and practical difference
and purchase, the only asset that changes hands is the shares in Share Sale
the target company. The buyer will acquire the target company Only asset that changes hands is the shares in the target
with all its assets and liabilities and, as far as the outside world is Buyer will acquire the target with all assets and liabilities
concerned, nothing will have changed. Extensive due diligence is required
Asset Sale: If a buyer buys a business as a going concern by means Asset Sale:
of an asset sale and purchase, all the individual assets of the All the individual assets of the business concerned will
business concerned will be transferred to the buyer together with be transferred to the buyer together with the goodwill
the goodwill of the business. of the business
The buyer will continue the business in succession
STAGES OF A TRANSACTION The employees will automatically transfer as a liability
Structure of the transaction likely to be influenced by the relative under TUPE.
bargaining strengths of the buyer and seller. Majority of the liabilities will remain with the selling
An earn-out is most appropriate where the sellers is/are company
individuals who are going to continue to work for the target
company after completion. The earn-out is likely to incentivise the A sale of some assets
sellers, as the greater the profits of the target, the greater the A sale of some assets is different to an asset sale.
deferred consideration they will receive. A sale of some assets is collectively insufficient to
constitute a business as a going concern.
The following is a private treaty sale rather than an auction sale.
The process is different whether it is a treaty or auction sale. What happens when the company is sold?
Share Sale:
If a subsidiary is sold to a third party, then the seller
shareholder directly receives the sale proceeds (direct
parent company). They will also pay corporation tax. The
buyer will pay stamp duty on the consideration at 0.5%.
If a company is sold that has subsidiaries then they will
remain subsidiaries of the parent company. The buyer
will become the ultimate parent company.
if the target is sued after being sold, then the litigation
remains with the target, but the new parent becomes
indirectly responsible.
employees remain employees of the target, nothing
changes until there is a change of control clause
If the ultimate parent company is sold, then the buyer
will also buy the entire issued share capital of all the
subsidiaries and group becoming the new ultimate
parent.
Asset Sale
If a business is sold to a third party, then the selling
company (shell) will receive the sale proceeds
If there are subsidiaries, whether they transfer to the
buyer depends on the acquisition agreement due to the
possibility of cherry picking. If they are included they will
become subsidiaries of the seller, if not they will remain
the seller’s (shell) subsidiaries.
employees will automatically transfer to become
Transactions can conclude either via simultaneous exchange and employees of the buyer by virtue of TUPE
completion or split exchange and completion. This depends on a if the assets are sold, then property needs to be
requirement to obtain external consents. Split exchange and independently transferred.
completion will result in additional contractual provisions.
Hive Down
Always consider: This is a combination of an asset sale and share sale. The seller will
What is being sold (including any subsidiaries) transfer a business into another company from the parent down
Why is it being sold? e.g., consolidate and focus on a to the subsidiary that it owns (asset sale) and then sell that other
core market company to the buyer (share sale).
What attracts a buyer? valuable brand name, goodwill,
market presence (30 years), client base (multinational This is used when for tax purposes, a share sale is more beneficial.
company), contact base, technology, IP rights, It may also be if there is a liability the buyer doesn’t want but it
management, experience, high cash conversion (clients does want to structure the deal as a share sale and purchase.
pay in advance), high margin products, stability
(consistency in profitability and repeat business). Hive Up
Who would be interested? Existing rivals, private equity You can also transfer assets up to a parent company.
funds, those who do not yet have a presence in the UK
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, DIFFERENCE BETWEEN A PRIVATE TREATY SALE VS.
AUCTION SALE
• Private treaty: the seller negotiates with a single
prospective buyer.
• Auction: the seller is seeking bids for the target company
or business from several prospective buyers in a
competitive tender process
Apply to facts: if higher professional fees, why are they higher?
Anything relevant on the facts?
Private treaty sale Auction Sale
DD Buyer sends DDQ to seller, Indicative bids before
seller sends DD report or access to the Data room
docs
Docs • Heads of • Execute
Agreement confidentiality
• Confidentiality agreement
agreement • Send out IM
How to spot the differences between a share and an asset sale (mostly non- and process
binding) letter
Share Sale Asset Sale • exclusivity • Review
agreement (lock indicative bids
Description Shares of [company Business of [company name] or out)
name] or just [company name]’s business
[company name AA Drafted by Buyer Drafted by the Seller
Seller Shareholder Company that owns the business DL Drafted by the seller
Sale Go directly to seller Need to be extracted by the Auction Sales:
proceeds shareholders of the seller Advantages to seller Disadvantages to the seller
company by dividend or access to multiple Not appropriate if
liquidation potential buyers, limited market or
Target’s Remain with target Depends on acquisition prevents the sale complex business
subsidiaries agreement falling through with Risk of confidential
concurrent information leaking
Target’s Remain with target Likely to be left behind as it is a negotiations Risk of a failed
litigation (reduces value of liability capitalise on auction and
target) competitive tension reputational
Employees Remain with target Transferred to buyer with TUPE to maximise price damage if deal falls
Property Remain with target Depends on acquisition easy for directors to through
agreement show SH maximum Additional fees for
price obtained – the seller e.g.,
comply with additional
directors duties. professional fees
Control release of for the financial
sensitive advisor and sellers
information in the lawyers (to
data room and the negotiate and draft
time table. the AA)
More advantageous Greater
sale terms as seller management time
drafts AA due to multiple
Competitive process bidders Knowledge
allows the seller to of sale may
have a stronger undermine morale
negotiating position and relationships
Competitive bidding with customers and
pushes up the price suppliers
Good publicity
Advantages to the bidder Disadvantages to the Bidder
Lower price if Legal costs being cheaper is
few / no other qualified by the overall
bidders higher price
less negotiations; More expensive if many
may be quicker bidders and risk of wasting
and cheaper in costs
terms of legal Seller may pass this on
costs (seller drafts preliminary professional
AA; sets up data fees to the buyer through
room; less prelim higher purchase price
work for the Terms may be
bidder) disadvantageous e.g.,
Fake bid to gain warranties, indemnities
information on a (seller drafts the AA)
competitor using If successful, may be
the auction “damaged goods” due to
process to get confidential information
information about leaks / disruption to
the target business and reputation
affected
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, Less access to confidential
information and
management
Less time to build rapport
with the management
team who are dealing with
other bidders
Confidential information on the
target could be leaked or used by
competitors who have lost the
auction
Procedure in an Auction Sale
SELLER: instruct solicitors; identify prospective bidders; consider
preliminary issues
- NB financial advisor/investment bank will identify
purchasers
BIDDER(S): instruct solicitors
BIDDER(S): execute confidentiality agreement
- Also, called a non-disclosure agreement (NDA). This is
the most important document. It retains the value of
the business
- Must be signed and returned before IM goes out
SELLER: sends out information memorandum (IM) and process
letter (PL)
- PL = sets out process and timetable for auction
o invitation to treat but may include contractual
right to consider.
- IM = document containing enough information about
target to give bidders basis on which to make an
indicative bid.
- No IM or PL in private treaty sale.
BIDDER(S): review IM and prepare indicative bids
- Indicative bid = sets out basic terms upon which bidder
is prepared to buy target.
SELLER: prepare data room; review indicative bids (including form
of consideration and tax issues); select bidders to go forward
BIDDER(S): selected bidders visit data room
SELLER: draft acquisition agreement (AA)
- Buyer’s and seller’s contractual protections
- Property and environmental issues
- Employment, pensions and IP issues
- Tax issues
BIDDER(S): review and mark up draft AA
SELLER: review marked-up AA; select bids to go forward
BIDDER(S): site visits; prepare second bids
SELLER: select preferred bidder
- Blackpool Aero Club v Blackpool BC: seller not bound to
accept the highest bid. But if prescribed form and bidder
submits bid before deadline, bidder has contractual
right to ensure tender is considered if other confirming
ones are.
- Exclusivity could be agreed at this point but seller will
resist
- Unsuccessful bidders destroy confidential information
SELLER: prepare draft disclosure letter (DL)
BIDDER(S): review draft DL
BOTH: negotiate and agree AA & DL
- Biggest thing
BOTH: exchange contracts
BOTH: if AA is conditional, obtain necessary consents/fulfil
necessary conditions
BOTH: complete
- NB last 3 steps are showing a split
exchange/completion; it may be done all at once
- documents signed at exchange & become legally
enforceable; at completion, it’s signing of
documentation normally they occur at same time
NB: If completion is at the same time then all three last steps are
completed together. Documents signed at exchange and become
legally enforceable at completion. it is the signing of
documentation normally they occur at the same time.
Things you would expect to find in either a auction or private
treaty
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, confidentiality clause will be sufficient under Contract Rights of
Third Parties Act 1999.
This clause is designed to ensure that sensitive business info
about T is kept confidential. Knowledge or rumours of potential
sale can have an unsettling effect on the Target’s employees and
its customers and suppliers and can undermine the Target’s
goodwill. It may involve the loss of sales and key staff, or loss of
customers to a competitor.
Drawn up by the seller’s solicitor and should be drafted to fit the
PRELIMINARY STAGES - PROTECTIONS situation, bearing in mind that unreasonable or impractical
restrictions are less likely to be enforceable. Both parties sign it.
Concerns of the Buyer
A party interested in buying a company or business will wish to The confidentiality agreement will be entered into between the
learn all about Target to ensure it is worthwhile and worth the potential buyer and the seller. However, in practice, a potential
consideration. buyer will need to involve others in the process of evaluating Target
including senior employees of the buyer and its professional
The buyer acquires knowledge of Target through the due diligence advisers, banks and consultants. Inevitably, some of the confidential
process during the court of which legal, accountancy and other information will have to be passed on to these other parties. For
advisers will be engaged to investigate Target on behalf of the this reason, the seller will usually require the potential buyer to
buyer and report back on their findings. procure that persons to whom information is passed are also bound
to treat it as confidential. The seller may even require these third
This process is expensive and time consuming so, in an ideal parties to enter into confidentiality agreements directly with it,
world, a buyer will not wish to embark on the process until it can before they receive any confidential information.
be sure that the seller is committed to selling at a price the Buyer
is prepared to pay and the seller is not currently engaged in Exclusivity / Lock out agreements
negotiations with one or more other potential buyers. DD is expensive and time consuming. A buyer will want protection
against losing out to a rival bidder. Whether or not the buyer is
Concerns of the Seller able to secure this protection will depend on the strength of the
The seller will wish to ensure that it obtains the best possible price buyer’s bargaining position. If exclusivity provision in HoA rather
for the target but that the commercial integrity of the target is not than a separate agreement, expressly state that it is legally
compromised because of an aborted sale. The seller will binding.
appreciate that in order to negotiate a good price for the Target, it
must release confidential information relating to Target, but will Walford & Others v Miles & Another: an agreement attempting
not want to do this if the purchaser is not serious or an to bind the parties to negotiate in good faith (lock in) would be
unscrupulous competitor. unenforceable as it lacks certainty. However, a lock-out (cannot
negotiate with another party) is enforceable if certain and
Meeting the parties concerns – private treaty sale supported by consideration or made under a seal.
Here, the seller negotiates with just one buyer. The buyer will take
the initiative in due diligence by sending the seller a DD Meeting the parties concerns – Auction sale
questionnaire. However, before the seller will release information Confidentiality agreements
in response of the DD questionnaire, they will want to make sure All the potential bidders will have to sign separate confidentiality
that heads of terms are entered into, with confidentiality and agreements before any information is released. To allow a success
lock-out provisions. bidder to enforce the obligations in the confidentiality agreement
against unsuccessful bidders, the seller should ensure that it has
Heads of Agreement the right to assign the benefit of the obligations under the
These are brief, non-legally binding, record of the terms which the confidentiality agreements to the new owner of the Target.
two parties have agreed and should form the basis of the
transaction. This can be done before a solicitor is involved. They Process Letters
carry moral force so it may be more difficult to negotiate away Once the confidentiality agreements are signed, a letter will be
changes in the way the transaction is structured after the heads of send to the bidders on behalf of the seller, setting out the
term are signed. procedures and timing requirements for the auction sale. This
process letter will set out the auction process, including a list of
Confidentiality agreement details the bidders have to provide the seller in indicative bids.
The seller would draw this up and both the seller and potential This helps the seller who is more committed to the acquisition.
buyer sign it. This is designed to ensure sensitive business
information about T is kept confidential and not used for any The process letter will include the information memorandum. This
purchase other than evaluating T. contains information about the target to give the bidders a basis
on which to make an indicative bid for the Target. There is no
A confidentiality agreement (NDA) should be signed before the similar letter or memorandum in a treaty sale.
HoA are discussed. Often, the NDA and HoA are signed at the
same time. If they are included in the HoA it must expressly state Indicative bids
that the confidentiality provision is legally binding. It is often a There will be several bidders and each of those bidders will draw
separate letter. up a document setting out the basic terms upon which it is
prepared to buy the target – the document is called an indicative
Duration: This is important if the bidder is unsuccessful. bid.
Usually lasts around 3 years, might be possible to be
indefinite. If confidentiality provision is in HoA then BREAK FEES
expressly state it is legally binding. Confidential info Before they incur considerable expense involved in DD and in
should be destroyed or returned as well as keeping negotiation, they may enter a break fee. These are entered into
ongoing confidentiality. between a seller and a bidder and provided for a fee to be paid to
the bidder or seller if a specified event occurred which prevented
Level of protection: look at the definitions of the proposed purchase of the target from completing. The extent
confidential info and the proposed transaction and to which the fees will be paid and the trigger events will depend
confidentiality undertakings clause. It is likely the seller on the bargaining strengths of the parties concerned.
will want the fact the target is for sale to be confidential.
Will usually require potential buyer to procure that Break fees are most common in relation to public, rather than
persons to whom information is passed are also bound private companies. In the case of a private company, the seller can
to treat it as confidential (may even require TPs to enter enter into an arrangement to pay the purchaser a fee in respect of
confidentiality agreements). the due diligence costs or a liquidated sum upon the occurrence
of a breach of the exclusivity agreement.
Target may also be party to the NDA so that the Target can also
enforce the obligations. If not, a clause stating that both the seller
and the target are to benefit from and can enforce the
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