Mergers & Acquistions (M&A) Complete Notes - LPC - Distinction. Black and white to save printing costs and also allow own highlighting/colour coding. Additional material from own research including case law for extra marks. All in order of course as covered.
M&A: ASSET v SHARE PURCHASE
(B) ASSET PURCHASE
(A) SHARE PURCHASE = Transfer of identified assets of business; transfer as a going concern
= Transfer of ownership and control of company BENEFITS FOR BUYER
BENEFITS FOR BUYER • Cherry-pick assets
• Trade continuity as no change in company only ownership • Liabilities remain with the seller (some liabilities will be transferred if the buyer choses to run the
• Easy transfer of title – stock transfer form business)
• Direct receipt of consideration • Base costs (what you paid for in the first place) of assets is higher so corporation tax on capital gain
is lower
• Faster? But lengthy negotiation of SPA (can be a negative). Cost
• Apportionment of purchase price between assets (attributable to plant and machinery see below for
and length are fact-dependent so think more about where the
tax benefits)
solicitors time (and therefore client £££) will be concentrated on
• Tax flexibility, e.g. capital allowances (attributed purchase price rather than written down value
(asset sale is on transferring each asset, share sale is on W&I
book value – attributable to plant and machinery)
negotiation)
• Purchase of qualifying assets may allow buyer to use roll over relief on prior qualifying gains
• Likely to get more extensive warranty protection
• Work in progress deductible expense for reducing income profits.
• Ability to carry forward of trading losses against future trading
profits BENEFITS FOR SELLER
• No VAT payable • Less extensive due diligence limited only to the assets being acquired
BENEFITS FOR SELLER • There is no need for complex taxation warranties and indemnities since tax liabilities remain with
• Clean break Target
• Takeover exclusion but have (FSMA implications) • Some assets are transferrable by delivery, which is simple.
• Business asset disposal relief (individuals) • FSMA doesn’t apply to asset sales, thus the regulatory requirements are less onerous on the Seller
• Substantial shareholding exemption (Company) • Transfer of assets does not terminate contracts of employment (TUPE2006) it the sale represents ‘a
DRAWBACKS FOR BUYER transfer of an economic entity which retains its identity’, meaning the Buyer takes responsibility of
• Taking over company “warts and all” the employees from Target.
• More extensive due diligence
DRAWBACKS FOR BUYER
• More contractual protection needed through warranties and
indemnities • Each asset transferred separately
• Indirect receipt of consideration
• Liabilities remain with company whose shares being sold
• Slower? Transfer of trading contracts
• Tax deed of indemnity required
• Seller cannot assign burden and may need consent to assign benefit of contracts
• Change of control clauses? Will 3 party give notice to terminate?
rd
• Transfer of employees (negative if they are not good employees but could be positive) Unlike a
Even if no change of control clause, will 3 party renew?
rd
share sale where there is no change of employer.
• 0.5% stamp duty on share transfer (negative in that you have to • SDLT payable up to 5% on properties (compared to 0.5% stamp duty)
pay it but SPLT up to 5% on properties so cheaper than an asset • Potential transfer for VAT unless transfer of going concern
sale inc land)
• Base costs of assets lower so corporation tax on capital gain is DRAWBACKS FOR SELLER
higher. • Legal liability remains with Target
DRAWBACKS FOR SELLER • Even where Buyer has contracted to assume certain liabilities in the acquisition agreement, this will
• Buyer will want contractual protection via warranties and not affect third parties who may still pursue the Seller.
indemnities (twins!) • Other assets (Land/IP Rights) require a formal process to be followed, which can be complex
• S21 FSMA implications • Each individual asset must be transferred, which can give rise to complications if third-party
consent is required (e.g. Consent to Assign given by LL may cause delays).
, MORE DETAIL ON TAX CONSIDERATIONS - BUYERS MORE DETAIL ON TAX CONSIDERATIONS - SELLERS
• Taking existing liabilities? In SS, yes as they are built in. AS, no – remains with seller. • Chargeable disposals for sellers? SS: Gain on shares will be subject to
• Stamp duty / SDLT? In SS, yes 0.5% on any consideration. No calcs needed one exam. On tax. AS: dependent on whether gain or loss on assets, target pays.
AS, dependent on asset and is more than 0.5%. Also any shares as part of AS are chargeable. • What is the nature of the seller (individual or co) CGT or CT?
• VAT? In SS, not payable. As AS will be going concern transfer for us, not payable either. • What reliefs are available? only on qualifying assets so shares do not fall
• S45 loss relief available? i.e. setting existing losses off future profits… so long as same trade into ROR, individuals can use BADR (10%) and annual exemption. Body
Will be available on SS unless business does not drastically alter in next 3 years. Not for AS. corporate can use shareholder exemption (10% needed). Share for share
• ROR for buyer? No on SS. Available for AS if replacement bought for qualifying assets. exchange could be used to defer taxation paid. AS: ROR dependent on
• Capital allowances – WDA & AIA? unchanged. If B has unused allowances, can use for whether gain or loss and whether assets replaced going forward; others N/A.
these purchases on AS and new P&M will be added to their pools which can be claimed • Capital allowances N/A. AS: Reality check on assets. How does hold up
against. against HMRC’s prediction; balancing charge or allowed to carry forward
• Base cost of assets with respect to future disposals. On sale, the base cost is assessed on the allowance if continuing trade.
initial value paid, therefore more tax to pay. AS: Warehouse rebased as part of acquisition, • How does the seller receive the money and how does that impact tax
therefore capital gain has been dispersed. Less tax to pay. treatment? straight forward for SS. AS: double taxation (unless Group)
HEADS OF TERMS // LETTER OF INTENT
• Drafted up when negotiations have reached a certain point and the parties want to record the main points on which they have agreed and on the basis on which they are prepared to
proceed. First draft prepared by Seller and can include separate docs such as confi agreement or drafted in.
• Majority of terms included are NOT intended to be legally binding “Subject to contract” old so usual practice to include a specific term which spells out not legally binding.
Exceptions = confidentiality, exclusivity and liability for costs in the event of an abortive transaction. Also good practice to indicate jurisdiction.
• Exclusivity: Walford v Miles: exclusivity or “lock out” clauses i.e. where the seller will not enter into or continue negotiations for the sale of the target with anyone else are
enforceable (i) provided it is sufficiently certain, in that it specifies how long the period should last, (ii) must be in exchange for consideration (nominal but usually tied to the -ve
obligation; (iii) negative obligations only. Clause should include a remedy in the case of a breach, usually the recovery of costs incurred (valid liquidated damages) but cannot
constitute a penalty. Cavendish Holdings: test = detriment imposed must not be out of all proportion to costs involved in enforcing the legitimate interest of the innocent parties +
strong presumption if received legal advice, able to determine this. Costs incurred prior to the execution of the agreement can only be recovered if specified in the agreement, HoT
usually bear own costs.
• Advantages of HoT: Moral commitment; Complex transactions; Framework for binding commitments; Summary of transaction for third parties: BoD of parent group, prospective
underwriters, non-management s/h; Basis for clearance submissions; Basis for instructing advisers; Tactical advantage for seller? Specify jurisdiction to UK.
• Disadvantages of HoT: Limit room for manoeuvre; Create legal relations inadvertently; Accelerate need for public announcement of deal; Heads of terms (binding or not) may fall
foul of competition law rules; Adverse tax consequences In the UK, heads of terms can be evidence of an "arrangement" which restricts the ability of the parties subsequently to
take advantage of certain tax reliefs; Increase in workload.
CONFI AGREEMENTS
• Commercially-sensitive information will flow between the Parties as part of the pre-contractual negotiations, in fact, some parties will want to keep the existence of the proposed
acquisition itself a secret. Will include restrictive covenants which last beyond if the process breaks down. Need to be reasonable: time, geography & protect legitimate biz int.
• The seller is most at risk of sensitive information being released and so the initial draft of the confi agreement is provided by the seller. The Buyer will want to push back on too
onerous a burden given the cost implications and so will seek to restrict limitations to only the most sensitive info. + remedies: injunction and damages.
• Will need to include: A definition of confidential information likely to exclude information in the public domain or already known to the Buyer. Seller will want wide def.
Buyer wants clarity so everything should be labelled accordingly.
o An obligation on the buyer not, without the seller’s consent, to disclosure or use such information except for authorised purposes (as defined) in connection with the acquisition.
Usually there will be a list of individuals entitled to receive the information to reduce the scope and therefore possibility of leakage.
o Usually a non-solicitation and non-poaching of customers will be included (so long as they are not void on the basis they unduly restrict trade).
o An undertaking to the buyer to return or destroy information (including copies) if the acquisition does not proceed.
o Agreement that the parties will not, without the written consent of the other, make any announcement or disclosure of the fact the negotiations are taking place.
, M&A – DUE DILIGENCE
TYPES OF DUE DILIGENCE
Provides a preliminary commercial assessment of target business.
Business Advisers Consideration of the target’s market position.
Plays an important role in framing the negotiations, particularly on
warranties and indemnities. It will also speak to valuation of the
business and therefore price.
Will cover:
o Commercial activities of target
o Management structure and employees
o Taxation
o Profitability
Accountants Report
o Balance sheet strength
o Accounting system and policies
o Premises
Note that the practice on allowing the seller to have a copy of the report
is variable, and the buyer will have recourse against the accountants if
the reports are prepared negligently due to the implied terms
surrounding reasonable care and skill in their preparation. If buyer
relies on annual audited accounts, there will be no such remedy.
Handle preconditions which need to be satisfied for completion e.g.
consents and clearance from regulatory authorities.
Look to the constitutional framework of the target, terms on which it
Legal Advisers
does business, ownership of its assets and the extent of any liabilities.
An international legal team may be required for cross-border
transactions given discrepancies between local laws.
SCOPE OF DUE DILIGENCE
Avoids wasting time and costs.
Extend of DD is often determined by the nature of the target business,
Why important to
its size and the market it operates in addition to any concerns the sellers
determine?
may have about the particular buyer.
A share acquisition will require a more thorough DD process give the
Impact of type of fact that the buyer is purchasing the target “warts and all”
transaction for purposes I an asset acquisition, by comparison, the buyer will often agree to
of DD accept responsibility of certain liabilities by giving the seller an
indemnity in the SPA (see WS 6)
Instances where seller is not able to give much contractual protection to
buyer include situations where an insolvency practitioner is in the mix
Extent of Protection who will only be prepared to give limited contractual reassurances
about the target and an auction sale where the power remains with the
seller.
TIME! And time = cost and manpower.
Confidentiality limited pool of people with access to docs will slow
down DD.
Other Limiting Factors Also note that some agreements the target is party to will include their
own confidentiality provisions – including the non-disclosure of the
existence of the contract itself. If the k is disclosed during DD this may
be an issue. E.g. Kason Kek-Gardener v Process Components: seller
1
, disclosed to buyer existence of licence agreement which it was
prohibited from disclosing, leading to a termination of the licence.
THE PROCESS OF DUE DILIGENCE
Companies House, Land Registry, IP
1. Public Searches Prelim only and should not be totally relied upon as may be out of date.
Buyer’s lawyers will send detailed request for information to seller’s
side.
Although each firm will likely have its own version of this
questionnaire, they should always be tailored to the target at hand
2. Questionnaire
should address the typical risks inherent within that market and that
jurisdiction in addition to buyer’s pre-existing concerns, if any.
There should be a few follow ups to request better, more detailed
replies.
Used where information is particularly sensitive or where the sale is by
way of an auction with multiple bidders.
3. Data Room Nowadays, usually a secured website rather than a physical room.
N.B. use of tech: read only docs, AI to conduct searches and passwords
to limit those with access.
Types of report:
o Interim for lengthy and complex transactions, these types of
reports can operate as a early warning mechanism.
o Full audit complete but rare due to demands on time, resources
and wallets.
o By Exception Most common form of DD report, focusses on
what is material/unusual/unexpected. Usually contains an
Executive Summary at the top. This is followed by main sections
4. Production of covering areas of the target’s business, identifying any ‘problem
Report areas’ and suggesting how best to resolve them.
N.B. Statements made by third parties where the buyer has relied on
such statements, it will have a remedy against these third parties should
the information turn out to be misleading dependent on the Caparo
test: “proximity of relationship + foreseeability of loss + not
unreasonable to impose a duty of care [see page 69 of TB]. To limit any
possible exposure to such claims, the due diligence report will usually
include a section that sets out the agreed scope of the investigation and
any limitations on the advisors who have prepared it.
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