SGS 1: Introduction to Auction Sales. Exam
Questions With Correct Answers
How does an auction sale differ from a private treaty sale? - answer✔An auction sale differs
from a private treaty sale (or bilateral transaction) in that there are a number of potential
buyers competing to purchase the same target company. Each buyer will make indicative bids,
proposing the price of sale and any changes to the standard form share or asset purchase
agreement. The buyers are recruited by financial advisers.
Which documents are included in an auction sale? - answer✔Following a period of due
diligence conducted by the seller, the buyer will be provided with an Information Memorandum
('IM') and process letter which lay down details of the target company (i.e. the result of internal
due diligence) and the process and timetable of the auction respectively. The prospective
buyers will give an undertaking to keep all information confidential before exploring select
information of the target company. The seller has to counterbalance its general duty of
disclosure to avoid misleading the public and maintaining confidentiality of its data subjects.
What are the advantages of an auction sale? - answer✔Advantages of an auction sale to the
seller include that there is a larger pool of potential buyers thereby maximising the purchase
price of the target company, there will be more advantageous terms available to them, and the
seller is not refrained from accepting or rejecting any potential buyer. Furthermore, the seller
controls the due diligence process and the timetable for the auction, and they are free to run
simultaneous negotiations.
What are the disadvantages of an auction sale? - answer✔The disadvantages of an auction sale
to the seller include that there may be some legal restraints which make producing a standard
form agreement impractical or impossible, there may only be one or a few potential bidders
which could be sorted more suitably with a private treaty sale, and there is the tendency for
management to be distracted by the auction thereby disrupting the normal conduct of its
operations. The business' reputation may be taken into disrepute if the highest bidder doesn't
follow through on the deal, and the seller risks the target being viewed as "damaged goods".
Furthermore, an auction sale may be disadvantageous to a bidder who pays above market
value for the target company and leaves themselves vulnerable to the uncertainty of an
abortive deal, or if the target operates in a small market. On the other hand, a company of little
interest will be sold at an undervalue, which is advantageous as a buyer.
ALL RIGHTS RESERVED.
What should be abundantly clear from the Information Memorandum? - answer✔After reading
a memorandum, it should be abundantly clear what might attract a buyer to that company,
what the seller wishes to sell, and what type of company might be interested in buying the
target. In light of the example, the purchase of Eurolearn Ltd and its subsidiaries is appealing to
other providers of educational facilities and services due to the expansive breadth of the
target's services in both professional in-house and residential courses and their impeccable
goodwill and reputation in the educative sector.
What is the difference between share and business sales? - answer✔In a share sale, the
transferor is the seller company and will achieve a clean break from any liabilities of the
company. In a business sale, the transferor will be the target company who sells and receives
consideration for the assets they own. The benefit of an asset sale is that the buyer can cherry-
pick the assets and liabilities they wish to purchase.
What do the proceeds of a share sale go? - answer✔The proceeds of a share sale go to the
shareholders of the target company.
What is the effect of a share sale? - answer✔a. Any share sale has the effect of changing the
owners of the company, and will take all subsidiaries with them.
Who takes the consideration in the events of a business sale? - answer✔a. The target company
receives the consideration in the event of a business sale.
Which assets are subject to the acquisition agreement? - answer✔a. The assets subject to an
acquisition depends entirely on the bargaining strength and agreement of the parties.
What is the effect of purchasing the entirety of the issued share capital? - answer✔The
purchaser of all the issued share capital in a company will become the parent of that wholly-
owned company.
What are the preliminary documents of a private treaty sale and auction sale? - answer✔The
preliminary documentation of a private treaty sale is the Heads of Terms, Exclusivity
Agreement, and the Confidentiality Agreement, whereas the preliminary documentation of an
auction sale is Indicative Bids, Confidentiality Agreements and Process Letters (including
Information Memorandum). The Confidentiality Agreement must be signed before any other
preliminary documents or processes are undertaken or sent.
What is the important section of the confidentiality agreements? - answer✔Confidentiality
Agreements will define the term "Confidential Information" in the Definitions part of the
contract, and will outline the perennial nature of confidentiality (i.e. surviving termination or
repudiation of the agreement). The seller will seek to rely on the confidential agreement to
ensure that its trade secrets or sensitive information is secure whilst disclosing all key
2|Page
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller TheStar. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $10.49. You're not tied to anything after your purchase.
