INTRODUCTION Jurisdiction:
If the acquisition has an international dimension, specify the jurisdiction
TYPES OF ACQUISITIONS: used for dispute resolution.
In general, Sellers will prefer Share purchase acquisitions while Buyers Other issues:
prefer Asset purchase acquisitions as share purchase acquisitions also * Look out for spelling mistakes and clauses that are inconsistent
transfer the liabilities to the buyer. with the facts.
* Also check to whom the Letters of Intent are addressed: for APA,
Share purchase acquisitions: this should be the Company or for SPA, this should be the
1. Ownership and control of the Target company will transfer, but Shareholders.
Target will continue to own and run the business.
2. Involves an agreement between buyer and Sellers (individual Confidentiality Agreement:
shareholders)
3. The Target will retain its assets, liabilities, rights and obligations. Drafted by the Seller. Usually a separate letter but will sometimes be
4. s.1159 CA 2006 If Target is a wholly-owned subsidiary: Buyer included in the Head of Terms. – ensure it is legally binding.
only need to acquire more than 50% of Target’s holding company
for the Target to be considered Buyer’s subsidiary. – but it is Confidentiality Agreement = document preventing the Buyer misusing
beneficial to purchase all the shares. the information the Seller discloses to it during the due diligence
process.
Asset purchase acquisitions:
1. Ownership of specific assets in the target company will transfer. Seller and Buyer are both parties to the confidentiality agreement, but
2. Each asset will have its own way of transfer. STF for shares and Target may also be a party. – this is beneficial because if party to the
TR1 for land) contract, then can enforce the confidentiality obligations.
3. Most common where the Seller is an unincorporated business –
i.e. sole trader or partnership Parties’ objectives:
4. Complicated when only purchasing a division of the Target
company as you will need to cherry-pick the assets relating to Seller wants to Buyer wants to
that division from the whole. – i.e. if you are purchasing Tesla’s
robotics division but not it’s car division, you will need to 1. keep info confidential as 1. reduce limitations (especially so
separate the assets of the robotics division from the assets of the rumours can have a negative if those costs money)
car division. effect on key employees/the 2. achieve a narrow definition of
goodwill of the Target, and ‘Confidential Information’ and
Hive down: 2. set out procedures for the 3. for the restrictions to apply only
Hive down = a combination of asset sale and share sale. Seller transfers use/safe-keeping of that info to the most sensitive info
business to another company it owns as an asset sale and then sells that
company’s shares.
Hive up = the reverse – the subsidiary’s assets are transferred to the Mandatory inclusions – should not be missing:
parent company. • A definition for Confidential Information
• The Buyer’s obligation not to disclose/use Confidential
PARTY CONCERNS: Information except as consented to by the Seller.
Buyer’s concerns Seller’s concerns Possibly also include here:
1. List of authorised persons entitled to receive the info
Buyer will want to obtain info re • The seller will wish to ensure 2. Buyer not to solicit Seller’s customers/suppliers/
Target to ensure that: that it: employees for a specified period
• The acquisition has merit a) Obtains the best price for
• The consideration is the Target • The Buyer’s undertaking to return/destroy such info (including
appropriate b) Targets commercial copies) if the acquisition doesn’t proceed. Also include here: the
integrity not parties agree that they will not, without consent from the other,
Due diligence; fact finding exercise – compromised (due to make public their negotiations.
time-consuming and expensive the aborted sale)
buyer must ensure that the seller is:
• Committed to selling the • Release of Confidential Exclusivity/Lock-out Agreement:
target at an appropriate price Information; concern over
• Not currently engaged in validity of buyer intentions
negotiations with other and commitment Exclusivity clause = clause protecting the Buyer from losing the deal to
potential buyers a rival bidder.
Rules on drafting:
PRIVATE-TREATY SALE PRELIMINARY DOCS: * The clause must specify that the Seller will not negotiate with
other companies, it should not state that it will negotiate with
Private treaty sale = a deal that is privately negotiated between Seller Buyer.
and Buyer, without using an auction process. * Walford v Miles Must be sufficiently certain. – eg. should not
merely constitute an agreement to agree which is unenforceable
Heads of Agreement: * May be in a separate agreement or in the Heads of Terms but if
added to the Heads of Terms, them must ensure you state that
This doc sets out parties’ intents and fundamental terms. – Question it is to be legally binding.
will usually ask you to re-draft or correct mistakes in the doc. * Must include a time-limit.
* Must include a remedy in the event of breach – eg. the recovery
This document must contain provisions: of costs incurred during the acquisition process.
1. That it is to be legally binding * Buyer must provide consideration – eg. Buyer’s commitment to
2. Which jurisdiction the contract will fall under pay for the due diligence investigation.
AND
3. Grant exclusivity of negotiation AUCTION SALE PRELIMINARY DOCS:
Other useful provisions to add: Auction sale = a deal that is negotiated in public where potential Buyers
1. Seller’s obligation not to enter into negotiations with others can make a bid.
2. Seller’s obligation not to discuss the sale with others
Confidentiality Agreement:
Legally binding clause: Auction sales also use confidentiality agreements to ensure that the
There is a list in the Letter of Intent of which causes are intended to be information is only used for evaluating the Target.
binding: a clause which is not on the list will not be binding. – usually
Confidentiality, Exclusivity and Abortive Costs clauses. All potential buyers will be required to enter into a confidentiality
agreement. It should state that the agreement is for ‘the benefit of the
This clause is used as it would be disadvantageous for the Buyer if the future owners of the Target from time to time’ and for the benefit of the
whole Letter of Intent was binding. – what if he finds out something current owner (Seller).
during due diligence or wants to renegotiate the price later on?
Contracts (Rights of Third Parties) Act 1999 The successful bidder will
If you see ‘subject to contract’ in this document: delete it and replace it be able to enforce the agreement against the other bidders who were
with a ‘legally binding clause’ as it is outdated. unsuccessful.
Private Acquisitions – Revision Notes | Page 1 of 23
,Process letters: It is easy to have duplication of work between legal and financial due
diligence so to avoid this the buyer should list the matters which the
Process letter = Letter that will be sent to all potential bidders that are accountants should review in a letter of engagement.
identified by the broker before the auction but after the confidentiality
agreements are signed. Commercial due diligence:
* Environmental Report
* Report on Targets occupational pension scheme
Rules on drafting: * Report on insurance risks or statutory insurance requirements
* It will set out the procedure of the auction sale as well as the * IT and/or IP Report
timing. * Market Research Report
* It should also include a list of details for all the bidders such as
their financial circumstances, what they are intending to buy and * Transitional Service Agreement:
information as to competition. – This is done to help the sellers – Companies in the same group usually rely on each other
decide if the bids are appropriate. for products/services at a preferential rate.
* Must include a clause stating that all confidential information – This agreement ensures that this relationship with the
that has been received must be returned to the Seller in the Target continues for a specified period following
event if the bidder is unsuccessful. completion so that Buyer can set up alternative
arrangements.
Information memorandum:
Vendor due diligence:
Information Memorandum = A document that contains detailed
information on the target to enable the bidders to make an indicative Seller provides Due Diligence Report on Target to all bidders in an
bid. Auction Sale. They will also provide a data room to allow all bidders to
carry out due diligence at the same time to speed up the process.
Indicative bids:
Indicative bid = The terms for the offer, equivalent to the Heads of
Terms. – Sellers should avoid entering into exclusivity agreements.
Break fee arrangement:
Break fee arrangement = the fee paid to the bidder in case a specified
event occurs which would prevent the proposed purchase of the Target.
More common for public companies.
Rules on drafting:
* It should set out the specified events and the extent of liability
which will largely depend on the bargaining strength of the
parties.
* Can be used both ways so the agreement should set out that
either party agree to pay the other party’s fees if they cause the
prevention of the purchase.
DUE DILIGENCE:
The Due Diligence on Share Purchase Acquisitions should be more
extensive than for an Asset Acquisitions as this can be limited to
specific assets and liabilities.
Focus on verifying assumptions that helped you make the decision to
purchase the company.
Full investigation is needed to:
* Ascertain the merit of the acquisition as an investment
* Identify potential risks – eg. threatened/commenced claims,
low sales affecting the company
* Ascertain knowledge to gain strength in negotiation
* Identify contractual protections – eg. warranties, indemnities
* Establish if there is a need for regulatory consents/approvals
Legal due diligence:
Private-Treaty Sale:
* Buyer’s solicitor sends a Due Diligence Questionnaire to Seller’s
solicitors
* Seller’s solicitor sends the required info in response or sets up a
data room for the Buyer’s solicitors to access/review docs
* Buyer’s solicitor will then produce a Due Diligence Report
Auction Sale:
* Seller and Sellers solicitors set up a ‘data room’ about the Target
which selected bidders will be able to access and review
Financial due diligence:
Buyer will appoint a firm of accountants who will carry out a Financial
Due Diligence review and produce an Accountants Report.
Accountants Report will include an analysis of the Target’s:
* Past trading history
* Current trading position
* Trends regarding profits and margins
* Forecast trading results
* Suppliers and clients
* Main competitors
* Tax affairs
* Accounting systems and financial controls
* Management structure
Private Acquisitions – Revision Notes | Page 2 of 23
, REGULATIONS AND CONSENTS comply with SRA Financial Services (Conduct of Business) Rules
2001.
SHARE SALE SPECIAL CONSIDERATIONS FOR SELLER: FSMA – Financial promotion:
FSMA – Advising on an acquisition: Specified activity: Part II RAO
* Art. 21 Dealing in investments as an agent – buying, selling or
General prohibition: s.19(1) FSMA 2000 underwriting securities or other investments. This also includes
Carrying out a regulated activity in the UK is a criminal offence unless financial promotion. Providing the Information Memorandum
you are authorised or exempt. may be seen as financial promotion.
Regulated activity: s.22(1) Relevant exemptions to FSMA: FSMA FPO
Regulated Activity = Specified activity carried on by way of business 1. Art. 19(1) Communications made to investment professionals
that relates to a specified investment. 2. Art. 49(2)(a) Communications made to certain companies.
Called-up share capital of the company must be:
Specified activity: Part II RAO • £500,000 if the company has more than 20 members
* Art. 25 Arranging deals in investments – assist someone with • Otherwise £5million
buying or selling shares or arrange share transfers.
3. Art. 62(2)(b)(i) FPO Transactions under Art 70.
* Art. 53(1) Advising on the merits of investments – eg. advising Exempted if:
on insurance policies. • The communications relate to a share transaction in a
• Giving generic advice doesn’t fall within this category so body corporate, and
solicitors can give generic advice without needing • The shares carry 50% or more of the total share capital
authorization. voting rights with or without the shares already held by
• Advice requires an element of opinion + the person making the purchase.
recommendation on a proposed action.
Art. 62(2)(b)(ii) FPO If these conditions are not met, the
Specified investment: Part III RAO communication will still benefit from the exemption if:
• Art. 75 Rights under a contract of insurance: includes life • It was made by/on behalf of one person/company/
assurance contracts, endowment policies and other insurance partnership/group of connected individuals, and
contracts, such as insurance against the risk of fire or • Communication relates to a transaction that aims to
destruction, mortgage protection policies and legal expenses acquire/dispose of shares in a company and is
insurance. considered as being an acquisition of the day-to-day
• Art. 76 Shares control of the company.
• Art 77 Instruments creating or acknowledging indebtedness
such as bonds FSMA – Other relevant provisions:
• Art 88 Regulated mortgage contracts: all specified activities
that relate to regulated mortgage contracts are regulated. Prospectus:
Exclusions to FSMA: Part II RAO Prospectus Requirement: s.85(1) FSMA
It is unlawful for shares to be offered to the public without an approved
General exclusions: prospectus. This must be made available to the public before the offer is
A person will not be carrying out a specified activity if the activity is: made.
1. Art. 67 Regulated activity forms a necessary part of other
professional services: Consequences for non-compliance: imprisonment/fine
Solicitors are exempted, if the specified activities are:
• carried on in the course of carrying on any profession or Exempt offers: s.86(1) FSMA
business which does not consist of the carrying on of These are offers made to/directed at:
regulated activities in the UK; and • Qualified investors (banks, financial institutions) – s.86(1)(aa)
• the activities can reasonably be regarded as a necessary Art 1(4) PRR
part of other services provided in the course of that OR
profession or business. • Fewer than 150 people
2. Art. 70 Dealing with buying/selling of shares in a body These individuals are usually experienced in making investments, so
corporate: there is a lower risk of the public buying shares without knowledge of
Specified activity carried out in connection with the purchase or the consequences. The company relying on this exemption should make
sale of shares is exempt if one of the below is satisfied: it clear that this exemption applies when making the offer.
• Art. 70(2)(a)-(b) Shares (with/without buyer’s existing
shares) amount to 50% or more of voting shares AND Share sale only: Misleading Statements in the MoU:
the purchase/sale is between parties each of whom is a
company, partnership, individual or group of connected It is a criminal offence to: s.89(1) Financial Services Act 2012
individuals. • Make a statement that you know is materially false/misleading
• Art. 70(2)(c) The object of transaction may reasonably • Make a materially false/misleading statement recklessly
be regarded as being the day-to-day control of the • Dishonestly conceal any material facts in connection with a
company. statement
3. Art. 72C Information provided is incidental to giving advice: Consequences for non-compliance: imprisonment up to 7 years/fine
Exempted if:
• It merely provides info to client Misrepresentation Act 1967 Claimant in a misrep claim must show that
• Carried on in course of firm’s other non-regulated they mitigated their losses.
activities and Smith New Court It amounts to fraudulent misrep to inform one bidder
• Reasonably regarded as incidental to giving advice – eg. that there are several other bidders interested in purchasing the target
not advertised as a separate service and it is merely a at a given price when that is not true.
small part of the whole work done.
Conclude: DATA PROTECTION:
If activity is not exempt: Data Protection Act 2018 General Data Protection Regulations A data
If a firm is planning to carry out regulated activities which do not fall controller must comply when processing data:
within the s.327 and Scope Rules exemption, it will need to obtain * Processing: Holding, deleting or transferring of data – Due
authorisation from the FCA. Either obtain authorisation or refuse to diligence information transfer amounts to processing
carry out. * Data Controller: someone who processes the personal data
If carries out unauthorised activities, breach of s.19(1) FSMA which is Personal data must be processed fairly and lawfully and that certain
a criminal offence. conditions must be met:
* DPA 2018 Data subject must be informed of:
If activity is exempt, law firm must also: (a) The fact their data will be processed, and
1. Ensure it complies with any restrictions imposed on the firm in (b) The purpose of which their data will be processed
relation to this exempt regulated activity under Scope Rules * Liability: breach of the principle is not a criminal offence, but the
AND Information Commissioner may issue and enforcement notice
2. Be authorized by the SRA in relation to this activity and must requiring compliance with the principle; notice non-compliance
Private Acquisitions – Revision Notes | Page 3 of 23
