ACHIEVED DISTINCTION. Detailed and in-depth revision notes on Private Acquisitions including answers from past papers and other relevant sources, with mark allocation for each topic.
These notes cover all the information needed for the Private Acquisitions Exam and SGS solutions. I have condensed...
SGS 1: AUCTION SALE
1. How does the auction process actually work and how does it differ from a normal private treaty sale?
private treaty sale- only one buyer
auction sale- Process of witling down the buyers to the one seller wants to engage with
Def: Auction sale, which involves the seller seeking bids for the target company or business from several prospective
buyers in a competitive tender process.
2. What would be the advantages and disadvantages of selling Eurolearn in this way, both for ourselves and for the
potential purchasers?
Advantages of auction sales for us (sellers)
• The seller can usually reach a larger pool of potential buyers through an auction process.
• The competitive process maximises the price by encouraging potential buyers to bid against each other
• Enable the seller to secure better sale terms than might be achieved on a bilateral sale. The seller also has the
advantage of being able to run simultaneous negotiations with more than one bidder, thus allowing it to defer
committing to any one bidder until the principal deal terms have been settled.
• The seller controls the due diligence process, including the number and scope of the documents it will share
with participating bidders, and the time they have to complete their investigation into the target company or
assets.
• The seller can control the transaction timetable, in particular to reduce the time it takes to proceed from
agreement in principle to completion of the sale
Disadvantages of auction sales for sellers
• Not all businesses are suitable for sale by auction. If the market sector is limited and there are only one or two
potential buyers, an auction may not be appropriate.
• An auction may also be inappropriate where the structure of the target business is particularly complicated, or
where there are significant external factors affecting the transaction (such as regulatory or competition issues,
or material third party consents).
• The seller's transaction costs are usually higher than in a bilateral transaction.
• significant management time commitment by the seller (and, in the case of a share sale, the target company).
• Some bidders may not be serious about acquiring the target business and are interested only in finding out
information about a competitor.
Key drawbacks of an auction process from the bidder's (buyer’s) perspective include:
• It may be forced to pay a higher price for the target business than it might have done had it been the only suitor.
• The presence of other bidders reduces its chances of concluding a successful deal, thereby increasing its risk of
wasting management time and professional fees on an abortive deal. It is therefore important for bidders to
keep a tight control over the costs they incur in participating in the auction process.
• Bidders are likely to receive more limited due diligence information about the target business than on a typical
bilateral transaction, thereby increasing the transaction risk they are assuming.
• The level of warranties, indemnities and other contractual protections given by the seller in an auction sale is
likely to be lower than on a typical bilateral sale.
• Bidders will have less opportunity to build relationships with the target's management before the transaction
completes.
, • There is a greater risk of damage being caused to the target's business due to news of the sale getting out
before the auction process has concluded.
Smith New Court Securities Limited v Scrimgeour Vickers (Asset Management) Limited
While the seller or its financial advisers may be tempted to overstate the degree of interest or terms offered by other
bidders with a view to maximising competitive tension, doing so could give rise to liability for fraudulent
misrepresentation
1. Why might Eurolearn want to be able to rely on the terms of the Confidentiality Agreement? Is it able to do so?
2 ways of allowing a party to rely on the document
- Making them a party to the agreement (Eurolearn is not a party to the agreement only LTC is a party and
LTC would have no interest in enforcing this agreement)
- Another way is ensuring Eurolearn has third party rights
2. How long should the period in clause 4 be?
•Important if bidder is unsuccessful
•Indefinitely/[x] number of years from date of agreement
1) Silk Ltd (It would have to pay corporation tax on it and buyer would have to pay stamp duty).
2) Cotton’s direct ownership does not change but it’s ultimate ownership will
3) Cotton, shareholders would then have to extract it through dividend or liquidation
4) Depends on what has been agreed with the buyer.
5) litigation would continue against Jute but since the buyer buys shares in Jute, indirect concern to the buyer
, 6)litigation would still remain with Jute but in this case not a concern to buyer since buyer can opt out of choosing the
litigation and only pick the assets it wants
7) Employees remain with Cotton, Cotton as a co. is sold to the buyer
8) depends on the agreement with the buyer
9) The Buyer wool would become the parent co. of the whole group
Locked box mechanism
It should be noted that as an alternative to using completion accounts to adjust the purchase price, a mechanism called
a ‘locked box’ may be used. Instead of setting the purchase price by reference to completion accounts, the parties may
agree to use accounts that have been previously drawn up (the ‘locked box accounts’).
Part (a) identify the key differences between a sale by way of auction and a private treaty sale.
main differences to be in relation to the following: (i) the number of bidders; (ii) the due diligence process; and
(iii) who is responsible for drafting the documents and identified what those differences were.
Part (b) identify the preliminary documents relevant to an auction sale as well as the purpose of each document.
Students were required to identify the confidentiality agreement: required to protect the knowhow of the business
being sold; the information memorandum: required to provide information on the business to the
bidders; the process letter: required to provide information to the bidders on how to make their bids; and indicative
bids: the way by which bidders will detail the terms on which they are prepared to buy the business.
This ‘process letter’ will set out the process for the auction, including a list of details the bidders have to provide to the
seller in their indicative bids, which can assist the seller in its analysis of which bidders are more committed to the
acquisition.
MCQ
Price Prior’s client, Shakers Movers Limited (‘Shakers’), wants to sell its subsidiary Tarrants Limited (‘Tarrants’), which
runs a residential removals business. Shakers’ financial adviser has identified a number of companies that might be
interested in buying Tarrants (the ‘Potential Buyers’) and therefore has suggested that Shakers should consider running
the sale as an auction. Shakers sold another of its subsidiaries last year by way of private treaty sale and has asked for
advice on the auction process. Which of the following statements should you include in your advice?
i) An auction process is likely to be cheaper for Shakers than a private treaty process because in an auction it is normal
for the Potential Buyers’ solicitors to be responsible for preparing the first draft of all the main acquisition documents.
ii) Selling by way of auction will ensure that Shakers obtains a higher price for Tarrants than if it sells by way of private
treaty.
iii) In an auction sale, the Potential Buyers will conduct their due diligence on Tarrants via a data room rather than by
supplying Shakers with a questionnaire and expecting responses to that questionnaire.
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