Lecture notes
SGS 1 Private Acquisitions Notes
- Module
- Private Acquisitions
SGS 1 Private Acquisitions detailed notes first SGS - High distinction grade awarded.
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SGS 1 PA – introduction to auction salesAdditional chapter notes;
Approach to questions:
® Identify all legal issues to guide client on any potential problems
® Ensure client is aware of all legal consequences of each option
® Bear in mind the commercial and practical issues surrounding the transaction
+ what is of most concern to your client.
KEY: identify the RISKS.
Pre-SGS activity 1: email from Martin Saunderson
Share sales v asset sales:
Share sale:
® If the buyer buys a company by means of a share sale and purchase, the
only asset that changes hands = shares in the target.
® The buyer will acquire the target company with all its assets and liabilities and,
so far as the outside world is concerned, nothing will have changed.
® A share sale = theoretically more straight forward than an asset sale, although
extensive DD will need to be carried out into any liabilities that will come with
the company being purchased.
® On an asset sale, such liabilities will generally be left behind with the company
from which the assets are purchased.
Asset sale:
® If a buyer buys a business as a going concern by means of an asset sale +
purchase, all of the individual assets of the business concerned will be
transferred to the buyer together with the goodwill of the business.
® After completion of the transaction, the buyer will be able to carry on the
business in succession to the seller.
® After completion, the buyer will be able to carry on the business in succession
to the seller.
® As part of this acquisition, the buyer will automatically assume some of the
liabilities of the seller (i.e those under TUPE for employees).
® It may also agree with the seller that as between them, it will effectively
assume some other liabilities (such as those in relation to creditors).
® However, the majority of the pre-completion liabilities will remain with the
selling company.
Hive down:
® Essentially a combination of an asset sale + share sale.
® The seller will transfer a business into another company that it owns (the asset
sale part) and THEN sell that other company to the BUYER (the share sale
part).
® This method may be used because the ultimate sale to the purchaser needs
to be structured as a share sale (perhaps for tax reasons) and the business is
, currently operated, along with a number of other businesses of the seller,
within a single company.
® The hive down into a new company allows them to achieve this.
Hive up:
® Also possible to have a hive up instead of a transfer of assets down to a
subsidiary.
® A hive up will be a transfer of assets ‘up’ to a parent company.
Methods of payment:
Cash Simplest form of payment is that the
total consideration is paid in cash at
completion. Most common.
Shares (paper) If the buyer wishes to pay the
consideration in shares, the buyer will
issue shares in itself to the seller in
exchange for the transfer of the shares
in the target which are owned by the
seller. Known as a share for share
exchange.
Loans (paper) The buyer may issue loan notes to the
seller. A loan note in its simplest form is a
document that contains the terms of
the buyer’s debt to the seller.
If loan notes are to be issued, the terms
of the loan notes will have to be
negotiated (e.g when the loan notes
will be repaid and how much interest is
payable.
Earn outs:
• An earn out is where only part of the consideration is paid on the date of
completion, but the buyer agrees that it will pay an additional amount of
consideration at a particular time in the future (i.e 3 years after completion).
• This amount to be paid later is an element of deferred consideration and will
depend on the level of profits of the target company in the relevant period
after completion.
• This type of arrangement is most appropriate where the seller(s) is/are
individuals who are going to continue to work for the target company after
completion.
• An earn out close is likely to help incentivise the seller(s), as the greater the
profits of the target, the greater the deferred consideration they will receive.
Retention accounts:
• A buyer may be concerned that, in the event of a successful claim for
breach of warranty/ indemnity, the seller may not have enough funds to
meet the claim.
, • To address this concern = buyer may ask for a retention account (also
referred to as an escrow account).
• This is where the buyer and seller agree that a certain amount of the
consideration will be placed in a joint account (usually operated by both
parties’ solicitors acting together). Such monies will be available to the buyer
in the event of a successful warranty/ indemnity claim against the seller.
• The consideration remaining in the account after a certain period of time has
expired (often the warranty limitation period) is then paid to the seller.
Preliminary stages – concerns.
Concerns of buyer – a party interested in buying the Target will wish to learn all
about Target to ensure that it is (a) a worthwhile acquisition and (b) worth the
consideration being paid.
® The buyer acquires knowledge of Target through the DD process during the
course of which legal, accountancy and other advisers will be engaged to
investigate Target on behalf of them.
® Process is expensive and time consuming so, in an ideal world, a buyer will not
wish to embark on this process unless it can be sure that the seller is (a)
seriously committed to selling Target at a price the buyer is prepared to pay
and (b) the seller is not currently engaged in negotiations with one or more
other potential buyers.
Concerns of the seller – seller will wish to ensure that (a) it obtains the best possible
price for Target but that (b) the commercial integrity of Target is not compromised
as a result of an aborted sale.
® The seller will appreciate that in order to negotiate a good price for Target, it
must release confidential information relating to it.
® However, if it is going to release this information to the prospective buyer, it
will want to know that the buyer is seriously committed to the purchase and is
not a time waster or a competitor wanting to obtain secrets for the benefit of
their own business.
1. How does the auction process work and how does it differ from a normal
private treaty sale?
It differs from the private treaty sale because it involves the seller seeking bids for the
target company or business from several prospective buyers in a competitive tender
process.
How does it work?
Key stages:
1. Invitation to bid
2. Confidentiality undertakings obtained from prospective bidders
3. Distribution of an information memorandum to prospective bidders
4. First-round indicative bidding and shortlisting bidders
5. Bidder due diligence
6. Preparation and distribution of transaction documents
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