AUCTION SALES • Seller:
o Best possible price
CONTRACTUAL CONSENTS: E.g. suppliers, lenders
DATA PROTECTION ACT 1998
o Committed Buyers, not fishing/leaking confidential info
SHARE/ASSET SALE • DPA 1998 If data controller processes personal data on identifiable data subjects = fair processing principle
• Share sale *Company name > business of X Documents o 1) Obtain consent
o Parent receives proceeds: X à Y à Z - If sells Z, sells Y’s shares ∴ Y receives proceeds • Confidentiality Agreement (Non-Disclosure Agreement) § Inform of reason, e.g. for due diligence on potential sale
o Subsidiaries transfer: If sells Y, subsidiary Z transfers o Seller’s solicitor drafts + potential bidders sign § But confidentiality issues ∴ inform immediately after completion
o If buys holding company, Buyer = new parent of entire group o Scope: For current + future owners of Target o 2) Legitimate interest, e.g. personal data for potential sale
• Asset sale o CROTPA 1999 Successful bidder can enforce against unsuccessful bidders • ≠ Criminal offence
o If sells Z’s business, Seller = Z ∴ Z receives proceeds = cash shell to pass onto shareholders § Affects Seller + preferred bidder, b/c info revealed to unsuccessful bidders/fishing for info o But failure to comply w/ enforcement notice = criminal offence, civil action by employee + bad publicity
o If sells Y’s business, subsidiary Z transfer IF part & parcel of Y’s business • Process Letter • Employment Practice Code:
§ Yes: Mini-share sale = transfers o Auction process: Procedure, timings, info required from bidders (e.g. sources of finance = checks o ANONYMISE data
§ No: Remains w/ Y’s cash shell genuine bids + ££ laundering) § Test = identifiability, e.g. remove names, job titles
o Invitation to treat ≠ binding (to sell to highest bidder) o If sale ≠ proceed, Buyer returns/destroys
PRIVATE TREATY VS. AUCTION SALES *If fails to complete = break fees o But: o If possible, inform employees
PRIVATE TREATY Blackpool o New employer after acquisition = ensures info is relevant, accurate + not excessive
• 1) Agree: - Duty to consider all bids equally = cannot disregard bids • Completion:
o 1. Confidentiality Agreement o Refers to property seperately: LTC owns, not Eurolearn ≠ in share sale ∴ seperate transfer via TR1 o Share sale: Identity of data controller (Target) ≠ change ≠ processing personal data, unless Buyer
§ Seller’s solicitor drafts o Indicative Offers clause: Bid must confirm if for company / company & property + impact on price uses data for new purpose
§ Target may be party / CROTPA o If ≠ make indicative bid = return/destroy + not reveal confidential info o Asset sale: Disclosure + receipt of info = processing ∴ inform data subjects
§ Consistent w/ Heads
• Information Memorandum: Info on Target to base bids
o 2. Heads of Term (Memorandum of Understanding) LISTED COMPANY
o E.g. Sells b/c non-core business, invest in growth / Types of buyers = competitors to ↑ market share,
§ Agreed terms + basis for negotiation CLASS TESTS
investment company, international company wanting UK presence
§ ≠ Binding, except confidentiality/lock-out • Listed companies require shareholder approval for certain transactions
• Indicative Bid
o 3. Lock-Out Agreement *Lock-In ≠ enforceable • % Ratio tests:
o Initial understanding between parties ≠ binding
§ Prevents Seller negotiating w/ other potential Buyers o 1) Assets: Target’s ÷ listed company’s gross assets
§ Exclusivity granted early VS. Auction sale: Once selects preferred bidder *Seller ≠ want REGULATIONS *SHARE SALES / MINI-SHARE SALES, not asset sales o 2) Profits: Target’s ÷ listed company’s profits
• 2) Buyer’s solicitor sends DD Questionnaire + conducts due diligence REGULATED ACTIVITY o 3) Gross capital: Target’s ÷ listed company’s gross capital
• 3) Buyer’s solicitor drafts acquisition agreement • S19(1) FSMA 2000 Cannot carry out regulated activity, unless authorised / exempt o 4) Consideration: Consideration as % of aggregate market value of listed company’s ordinary shares
• 4) Seller’s solicitor prepares disclosure letter • S22(1) ‘Regulated activity’ = SHARE SALES • Thresholds:
• 5) Negotiates AA + DL o Part III Art 76 RAO Specified investments = shares o Class 1: If any % ratio = 25%/more
• 6) Exchange / If conditional, satisfy conditions precedents o Part II RAO Specified activities = auction sale § 1) Notify RIS ASAP w/ prescribed transaction details
• 7) Completion § Art 14 Dealing in investments as principal § E.g. Consideration, value of assets, profits attributed to assets, effect on listed company
§ Art 25 Arranging deals in investments/securities, e.g. help client buy/sell shares § 2) FCA-approved explanatory circular = sent to shareholders
AUCTION § Seller’s solicitor: Art 25 / Art 53 Advising on investments, e.g. merits of selling shares § 3) Shareholder approval *OR = condition precedent ∴ splits exchange + completion
• 1) Identify potential bidders • Exclusions: o Class 2: If any % ratio = 5-25%
• 2) Sign confidentiality agreements o Art 28 Arranging transactions, where arranger = party à Seller, b/c party to share sale agreement § Notify RIS ASAP w/ prescribed transaction details
• 3) Send Process Letter + Information Memorandum o Art 29 Arranging deals via authorised person (financial advisor) à Seller’s solicitor
o Bidders: Prepare indicative bids o Art 70 Sale of body corporate à Both *Same as Art 62 FPO RELATED PARTY TRANSACTIONS
• 4) Prepares data room + reviews indicative bids (VS. Heads of term) • LR 11 Transactions between listed company/subsidiary + related party
INFORMATION MEMORANDUM o Related party: Director/shadow director / substantial shareholder / person w/ significant influence /
o Selected bidders visit data room
Financial promotion any associates
• 5) Seller’s solicitor drafts acquisition agreement
• S21 FSMA Cannot communicate financial promotion = criminal offence, unless authorised / exempt o E.g. management buyouts = Target (listed company/subsidiary) + management
o Bidders: Mark up AA
o Information Memorandum = induces Buyers to buy Target’s shares • 1) Announce to RIS
• 6) Reviews marked-up AA + selected bidders conduct site visits & prepare 2nd bids
• Exemption stated in Information Memorandum: • 2) FCA-approved explanatory circular = sent to shareholders
• 7) Selects preferred bidder: o Art 62 FPO Sale of body corporate
o Factors: Cash, secured funding, unlisted company • 3) OR/conditional
§ 1) Conditions / o But related party cannot vote
• 8) Seller’s solicitor prepares draft disclosure letter § 50%+ voting shares in body corporate (/added to shares already held) +
• 9) Negotiates AA + DL • Exceptions:
§ Parties = individual/company/partnership/group of connected individuals o 1) Small transaction: All % ratios < 0.25%
• 10) Exchange / If conditional, satisfy conditions precedent § 2) (2)(b)(ii) Reasonably regarded as acquiring day-to-day control of body corporate’s affairs o 2) All % ratios < 5%, but 1/more > 0.25% = relaxes rules
• 11) Completion o If sells minority shareholding, only send information memorandum to:
Seller § Art 19(1) Investment professionals DISCLOSURE
§ Art 49(2) High net worth company (20+ member, > £500k) • Listed company must disclose new major developments if ≠ public info + significant effect on share price
• + ↑ Potential buyers
• + Competitive = ↑ price Prospectus • Exception: DTRs May delay if prejudices legitimate interests, e.g. negotiations –
o 1) ≠ Mislead public +
• + ↑ Contractual protection: Seller prepares first draft of AA • S85(1) FSMA Shares ‘offered to public’ = requires prospectus
o 2) Those receiving info owes duty of confidentiality +
• + Controls timetable + disclosure in data room • Exemption: S86(1) Limited to < 150 people / qualified investors (e.g. banks, investment institutions, govt)
o 3) Ensures confidentiality of info
• + Publicity o Reflected in Information Memorandum disclaimer: ‘Intended for limited no. of persons’
• But if breach of confidence in negotiations, e.g. news leak = must disclose
• + Directors can show shareholders they obtained best possible price
Misleading statements e.g. ≠ disclose litigation
COMPETITION LAW *Share and asset sales
• - Few buyers ≠ suited to auction • S89 FSA Criminal offence = *‘Relevant investment’ = shares, not business
o Make statement he knows is materially false/misleading • Either EU (Commission) / UK (CMA)’s jurisdiction, not both
• - Risks low price
• - Costly: ↑ Fees to prepare docs o Dishonestly conceal material facts UK MERGER CONTROL
• - Hard to maintain confidentiality = ↓ sales + staff morale o Recklessly make statement that is materially false/misleading • ‘Relevant merger situation’: 2/more enterprises ceased to be distinct
• - Non-serious bidders fishing for info o + For purpose of inducing someone to enter agreement to buy shares o 1) Turnover test: Target’s turnover in UK = > £70m /
• - If no sale, failure = public • Cannot embellish Information Memorandum o 2) Market share test: Merged entity (Target and Buyer) = 25%+ market share in UK
• - Wastes management time, e.g. sit1e visits, many bidders o Rescission: Not if shares sold +/ § Process Letter: Indicative Offer clause asks bidders to confirm market shares
o Damages • NO duty to notify CMA
Bidders o Against any misrepresenting party o But voluntarily pre-notify, otherwise CMA investigates on its own initiative
• + If few bidders, ↓ competition = ↓ price Smith New Court • Phase I: 40 working days
• + Quicker - Broker overstated interest in Target, which 1 bidder relied on + bought shares o Clearance / undertakings / Phase II
• + Cheaper: ↓ Fees, b/c Seller prepares ↑ docs ∴ Fraudulent misrep = damages • If ‘substantial lessening of competition’ à Phase II = 24 WEEKS
• + If selected as preferred bidder = redresses imbalance, b/c exclusivity period to negotiate o During investigation, Buyer cannot take steps
CONSENTS *Consents = condition precedent ∴ splits exchange + completion
• - No guarantee of success = wasted costs SHAREHOLDER CONSENTS o Clearance / undertakings, e.g. divest all/part of business / blocks merger
• - Potentially high price • Q) AoA requires consent? EU MERGER CONTROL
• - ↓ Contractual protection • S188 CA Directors’ long-term service contracts > 2 years = OR • 1) MUST notify Commission before transaction
• - ↓ Control of timetable + data room = ↓ disclosure • S190 SPT between company + 1/more directors = OR/conditional *Business sale = non-cash assets o High turnover thresholds apply to Buyer’s entire group
• - Spends ↓ time w/ Target’s management • S197 Loans to directors = OR • 2) Requires clearance before completion
• - If confidentiality breach = risks damage to Target *‘Deal leaked to press’ • S217 Pay leaving director = OR o If ‘significantly impedes effective competition’ = no clearance
• S551 Authority to allot = OR • Phase I: 25 working days
Concerns
• Buyer: REGULATORY CONSENTS • Phase II: 90 working days
o Before DD, Seller = • FCA-regulated Target: FCA consent for > 10% changing hands = criminal offence
§ Committed to selling at price Buyer is willing to pay • Newspaper merger: SoS consent
§ ≠ Negotiating w/ other Buyers • Acquires company w/ oil/gas interest: Regulator consent
o Due diligence: 1) Consideration? 2) Worthwhile acquisition? • Aircraft operators require Air Operators’ Certificate from Civil Aviation Authority
, EU Dimension? • Advice: FINANCE + TAX ISSUES
• Primary threshold o Target enters transitional services agreement 1) Charge by way of Legal Mortgage
o All: Worldwide turnover = > €5bn + § LTC continues providing services for short period after completion ∴ time to find alternative • See loan agreement = check EODs
o 2: EU turnover = > €250m arrangements
2) Cross-guarantee
o Exception: Each achieves 2/3 of turnover in same MS o Make new HR/payroll arrangements
• 1) Eurolearn cross-guaranteed LTC’s borrowings
§ Affects profitability: At cost / may cost ↑ in future
• If not, secondary threshold: o Buyer: Post-completion ≠ want Target to guarantee borrowings of non-group company
§ But if Buyer has its own services ≠ issue
o All: Worldwide turnover = > €2.5bn + o Advice: Release at completion
o 3: Turnover = > €100m + 4) Pension schemes § Bank wants new guarantor (e.g. another LTC group company)
o 2: Turnover = > €25m + • Share sale: • 2) LTC cross-guaranteed Eurolearn’s borrowings
o 2: EU turnover = > €100m o S75 Pensions Act 1995 If Target is member of group final salary scheme + in deficit, when leaves o LTC ≠ want to guarantee borrowings of company it no longer controls
o Exception: Each achieves 2/3 of EU turnover in same MS group = Target liable for its portion of deficit *Buyer issue o Advice: Release at completion
• Asset sale:
3) Property e.g. 2000: LTC acquired X for £134k, 2016: Transferred to ERL, Now: ERL leaving group
o Reg 10 TUPE
DUE DILIGENCE
• 1) Intra-group transfer
§ Personal pension scheme rights transfer
o 1. SDLT clawback *Buyer issue
§ Occupational pension scheme rights ≠ transfer
§ Company receiving LAND, b/c intra-group transfer = leaves group within 3 years of transfer
§ But Transfer of Employment (Pension Rights) Regulations 2005 Buyer must set up
§ SDLT clawback arises in company leaving group (ERL)
pension scheme + make min. contributions
• Aim: Investigates Target § Indirectly affects Buyer: ↓ ERL value = ↓ EL value
o S75 Pensions Act 1995 If group final salary scheme, in deficit + all employees transfer ∴ Target
o 1) Decides if requires warranties/indemnities/consents § Advice: Buyer wants ↓ price / indemnity
ceases to participate = Target liable *Seller issue
o 2) Assists negotiations o 2. Exit/degrouping charge *Seller issue
• Once completes actuarial report = revisit issue
o 3) Assesses risks + liabilities = decides whether to go ahead § Company receiving chargeable asset, b/c intra-group transfer = leaves group within 6 years
o 4) Buyer beware (Caveat Emptor): Little protection if ≠ what Buyer expects Due diligence on pensions § Advice: Seller gets tax advice on how to mitigate charge
• Share sale: ↑ Extensive, b/c liabilities remain w/ Target • Confirm:
• 2) Deemed distribution
• Asset sale: Assets being acquired o Registered
Aveling
o Sufficiently funded
• Legal: Solicitors - Intra-group transfer at undervalue = deemed distribution
o All contributions made
o Private Treaty: Buyer’s solicitors send DD questionnaire + gives DD report to Buyer o Advice:
• Details/docs of:
o Auction: Seller sets up data room for selected bidders + gives DD report to bidders = quicker o Pension schemes + benefits § 1. Request copy of LTC’s accounts from time of intra-group transfer = confirms sufficient
• Financial: Accountants o Trustees, trustee annual reports, audited accounts distributable profits at time of transfer ∴ proves lawful distribution
o E.g. trading history, profitability, suppliers, customers, competitors, tax affairs etc. o Actuarial report § 2. Indemnity: If insufficient distributable profits = unlawful distribution ∴ transferee (ERL)
• Commercial: Reports on environment, pensions, insurance, IT, IP o Target’s agreed contributions holds property on constructive trust, not beneficial owner
DATA ROOM o Claims
POSSIBLE SOLUTIONS
HR ISSUES CUSTOMER + IP ISSUES • 1) Condition precedent / post-completion matter, e.g. insurance
1) Employment contracts 1) Key contracts • 2) ↓ Price / warranty / indemnity
• 1) Directors’ service contract • Buyer wants them to continue as clients: State how much key client represents total business • 3) Restructure as asset sale
o 1. Missing / onerous RC ≠ enforceable ∴ can compete • See copies of contracts • 4) Withdraw
§ But non-disclosure of confidentiality clause = indefinite ∴ comfort • 1) Duration
§ Advice: o 1. Ending soon
CONSIDERATION
*Considering bids:
§ Target enters enforceable RCs, in return for consideration § Once identifies Buyer, approach client to negotiate longer term § 1) How much?
§ 36 months ≠ reasonable à 12 months o 2. Ended § 2) Form of consideration?
§ LTC to review all service contracts across group § 3) When does Seller receive consideration?
§ Ask if being renegotiated / show new signed contract
§ Keep director for short handover period (1 year), b/c know-how of business + market § If no new contract, ↓ purchase price to reflect impact on Target’s future profits
o 2. Letter varied contract to rolling 1-year 1) CASH
o 3. Typo: “5-year period 2013-2017”
§ Advice: Ask Seller to confirm director accepted variation + check letter signed by director § Confirm contract ends in 2018, not 2017 • 1) Debt free/cash free: Assumes no debt/cash in Target ∴ parties must know how much cash/debt in Target
• 2) Change of control: Other party can terminate if Target’s shares changes hands • 2) Net asset value *Banking docs ≠ issue, b/c bank debt paid off as part of completion
• 2) Employee service contract o 1. Completion accounts
o 1. DPA ‘Processing’ personal data = inform employee of reason, but confidentiality issues o Affects SHARE SALES *Asset sale: Target ≠ change hands, b/c assets transfer
o Too early to approach, b/c response depends on chosen Buyer § Adjusts purchase price post-completion
§ Advice: Anonymise before putting in data room = avoids breaching DPA § At completion, Buyer pays purchase price based on estimate of Target’s NAV
o 2. Statutory notice o Advice: *If key client = Buyer ≠ issue
§ Once finalises accounts + determines actual completion NAV = adjust
§ Employment Rights Act 1996 Employees require 1 week’s notice after 1 month’s service, then 1 § Once identifies Buyer, approach client ASAP + sign waiver not exercise right to terminate
§ Higher NAV = Buyer pays ↑
week’s notice for every year of service up to 12 years when Buyer takes control
§ Lower NAV = Seller refunds
§ Reassure no material change to contract
• 3) Freelancers § Drawn up after completion, b/c info & financial records become available
§ Suggest grace period to not terminate
o Advice: Anonymise before putting in data room = avoids breaching DPA § Schedule sets out completion account details, e.g. who prepares, mechanism, what occurs in
§ Client = strong bargaining position to renegotiate terms
event of dispute, how/when adjusts
Due diligence on employment issues § Condition precedent
§ Agrees max. cap on consideration if ↑/↓
• Key/shared employees • 3) Non-assignment *In termination clauses
o 2. Locked box mechanism
o Affects ASSET SALES
• Salaries + benefits § Valuation of Target based on last set of accounts w/ no adjustment post-completion
• Standard T&C, directors’ service contracts, consultancy agreements, freelancers 2) Debt § + ↑ Certainty
• Notice periods, e.g. onerous • 1) Possible non-payment § Seller indemnifies Buyer for ££ taken out of Target since last set of accounts
• Terminations • 2) Loses customer’s business § Only Seller’s deliberate acts, not general business downturn
• Litigation • Advice: Indemnity to cover unrecoverable part of debt 2) LOAN NOTES
o If small claim ≠ ↓ price, but indemnity o Seller: Ensure Buyer = obligation to use ‘best endeavours’ to collect debt in full
• Buyer leaves some/all consideration to be paid after completion
2) HMRC Investigation: Self-employed? 3) Trade marks
BUYER
• 1) If ‘employees’, Target pays unpaid income tax + NI contributions • 1) No. X for class X due for renewal in XXX
• + ↑ Time to raise cash: Cash flow advantage
• 2) ↑ Employment costs, b/c ↑ employees than expected • 2) No. X for class X which was due for renewal in XXX + no evidence of being renewed
• + Set off warranty/indemnity claims against amount it owes Seller under loan notes
• Advice: • Advice:
o Press HMRC for answer / o How important is trademark? • - Buyer must pay interest to Seller VS. Discretionary dividends on shares
o Seller: If ongoing investigation = indemnity to cover costs (b/c believes investigation will fail) > ↓ price o Is trademark being used in business? o + But tax-deductible, unlike dividends
§ But resist covering ↑ costs incurred going forward if freelancers are kept as employees o Has trademark been renewed? • - Unlike shares, Buyer must raise cash eventually
o Seller pays for expired trademark + Buyer pays for trademark to expire • - ↑ Gearing: Attracts ↓ future lenders/investors
3) Shared services
• Other parts of Seller’s group provides servbices, but ≠ incl. in sale, e.g. HR/payroll 4) Intra-group trading SELLER
• Once Target leaves group, services stop • Q) Are textbooks essential to business in future? • + Interest
• If affects Target’s profitability = depends how shared services costed out in group • Yes: • + Defers tax
o Market rate ≠ affect Target’s profitability o If course materials = designed around these textbooks = costly to change textbooks
o If pays LTC’s costs = Eurolearn worth less than expected ∴ ↓ price o Buyer: Secure supply of textbooks for agreed period after completion ∴ time to adapt courses to • - Delay: Cash flow disadvantage
use diff textbooks • - Cannot redeem if Buyer in financial difficulty
o Seller: Consider on what terms o ∴ Seller should get security/guarantee = ↓ risk e.g. newly incorporated company = get security
• No: If suitable alternatives, substitute textbooks • - Possible set-off
o Depends if Buyer is already in business of language training
• Cost of textbooks = affects profitability + purchase price that Buyer is willing to pay
