Summary
Summary Private Acquisitions Notes
- Module
- Private Acquisitions
Comprehensive distinction level notes for BPP LPC Private Acquisition Module
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Private Acquisitions: Revision SummarySHARE SALES & ASSET SALES
- Share Sale – Buyer purchases a company by purchasing the shares in that company – buyer acquires target company
with all its assets/liabilities + no external effect on the target company which retains its legal status/identity.
- Asset Sale – Buyer acquires all the assets from the seller which are necessary in order to operate the target business
previously operated by the seller as a going concern – buyer carries on the business in succession to the seller after the
completion of the transaction.
- Majority of pre-completion liabilities remain with the seller subject to agreement between the parties + operation
of law (e.g. TUPE Regulations 2006).
- Sale of individual assets to different buyers on a piecemeal basis does NOT amount to an asset sale if the assets
sold to each buyer do not collectively allow the buyer to operate the seller’s business as a going concern.
- ‘Hive Down’ – Combination of an asset sale + share sale – seller incorporates a new company and transfers assets to
that newly established company by way of an asset sale – newly incorporated company then sold to 3 rd party buyer by
way of a share sale.
- Used where seller seeking to sell part of its business BUT seeks to effect the transaction by way of a share sale OR
where buyer wishes to acquire seller’s business but leave particular liabilities with the seller BUT structure the
transaction as a share sale.
CONSIDERATION
- Debt-Free/Cash-Free – Method of agreeing purchase price for target where consideration based on assumption that
there is no cash/no debt in the target company so that initial valuation of target company based solely on underlying
value of its business/assets – parties must then use completion accounts to determine the amount of cash/debt in the
target company and adjust the consideration accordingly.
- Net Asset Value – Purchase price based on target company’s NET ASSET VALUE (NAV) based on last set of
audited accounts – parties then agree that purchase price may be amended post-completion to take account of any
material change between NAV based on last audited accounts and NAV on completion as determined by reference to
completion accounts.
- Completion Accounts – Used to show financial position/value of target business/company at date of completion –
can result in variation of purchase price to take account of:
(a) cash/debt left in company on completion where purchase price determined on a cash-free/debt-free basis;
(b) difference between NAV of target company/business as determined by reference to last audited accounts and
NAV as indicated in completion accounts.
- Where purchase price liable to variation on basis of completion accounts, parties will often agree to a MAXIMUM
CONSIDERATION figure to limit amount payable regardless of results of the completion accounting process.
- Locked Box Mechanism – Parties agree to conclusively set purchase price according to previously drawn up set of
accounts – allows parties to finalise purchase price prior to completion in order to provide greater certainty and avoid
costs/delays associated with preparation of completion accounts.
- Seller generally agrees to indemnify the buyer in respect of funds extracted from the target business/company
other than in the ordinary course of business after date of locked-box accounts BUT this does NOT protect buyer
against decrease in value of target business/company which do not result from deliberate acts of the seller post-
locked box accounts date – exposes buyer to risk of paying an inflated price in order to purchase the target
company/business.
- Methods of Payment – 3 main methods of payment are:
(1) Cash – Purchase price paid solely in cash on completion – most common + simplest + preferred by sellers due
to instantaneous provision of liquidated sum.
(2) Paper – Only possible where the buyer is a company which is capable of making payment by way of issue of
SHARES in itself to the seller OR by issuing LOAN NOTES to the seller upon which capital payment will be due
on completion and interest will be payable prior to completion.
(3) Earn-Outs – Form of deferred uncertain consideration – buyer pays part of the purchase price on completion
AND agrees to make further payments to seller on specified dates post-completion BUT the size of those further
payments is determined by the post-completion financial performance of the target business/company.
- Used where the seller is an individual who will continue to work for the target business/company post-
completion as a form of incentive to work to ensure the success of the business/company as this will result in the
individual seller receiving a larger amount of consideration under the post-completion payments.
- Retention Accounts – Parties agree that all/part of the consideration will be paid into a separate account jointly
operated by the legal representatives of the buyer/seller + buyer will be able to draw on balance of the account in event
of successfully bringing an action for breach of warranty/action on an indemnity against the seller.
- Consideration remaining in the retention account after a specified period of time (usually the expiry of the
warranty limitation period) will be transferred to the seller absolutely.
- Retention accounts used to address buyer’s concerns that the seller will not have sufficient funds to satisfy
successful claim for breach of warranty/indemnity which the buyer may bring against the seller post-completion by
providing the buyer with a readily available/ring-fenced source of funds against which it enforce any judgment it
obtains in a successful post-completion action against the seller.
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