o Benefit; the price can be finalised; provides certainty to both parties
1. INTRODUCTION TO AUCTION SALES
o Benefit: no additional delay or cost of preparing completion accounts
o Seller indemnifies the borrower for any monies taken out of the
SHARE SALE V ASSET SALES business outside the ordinary course of business;
e.g. Dividend payment; unauthorised leakage
Share Sale:
o Indemnity only covers specific deliberate acts of the Seller; ∴ buyer
The only asset that changes hands is the shares in the target company inherits risk of general downturn of the business
Buyer acquires the target with all assets and liabilities
Theoretically more straightforward, but extensive due diligence given risk FORM OF CONSIDERATION
of the transfer liabilities with the target
Form of consideration may act as a strong negotiation tool between parties;
Asset Sale: consideration can take various forms including:
Buyer purchases target as a going concern 1) Cash:
Individual assets of the business together with the goodwill are transferred o Simplest, most common & most desirable form of consideration
Enables the buyer to carry on the business in succession
2) Paper (Shares & Loan Notes):
Some liabilities automatically transfer; e.g. employee’s under TUPE
o The buyer may issue shares in itself to the seller in exchange for the
Don’t confuse with ‘Sale of some assets’; insufficient to constitute the
transfer of shares from the target; share for share exchange
business as a going concern
o Deferred consideration can be attained by issuing loans notes;
Share Sale v Asset Sale: document containing buyers debt to the seller; terms would be
Matter for the parties to decide; usually based on accountant and tax negotiated between the parties
specialist advice & bargaining strength of parties 3) Earn-Outs
o Part consideration is paid on completion; buyer also agrees to pay an
EXAM TIP – at start of a question, ask yourself: share or asset sale? Always watch additional consideration in the future at a set time
out for little bits of information in the fact pattern which will help you in your o Most appropriate where the sellers continue employment under the
answer! EXAM TEAM HAVE PUT IT IN THERE FOR A REASON!!! target post-completion:
o The greater the target profits the greater the deferred
HIVE DOWN
consideration ∴ incentivises management
Hive Down: Effectively a combination of an asset sale & share sale
Retention Accounts:
Seller transfers the business into another company that it owns (asset sale)
In the event of a successful claim for breach of warranty or indemnity, the
and then sells the shares in that company to the seller (share sale)
buyer may be concerned the seller may not have the funds available to
May be utilised if:
meet the claim; the solution is retention accounts
o For tax reasons; the ultimate sale is required to be a share sale
Certain amount of consideration is placed in a joint account; operated
o The seller runs concurrent businesses in the same company, which
jointly by party’s solicitors
the buyer does not want to buy all of
After a certain period of time has expired (often warranty limitation
o Unwanted liability; the initial business transfer can be used to
period) the consideration is then forwarded to the sellers account
remove the liability, whilst still allow an ultimate share sale
Hive Up: the reverse – assets of subsidiary are transferred up to the parent PRELIMINARY STAGES
company.
CONSIDERATION PARTY CONCERNS
Concerns for the Buyer:
Consideration: A key issue that both parties are interested in from the outset; Buyer will wish to obtain information on the target to ensure;
importantly they must agree what method will be used to agree the purchase a) The acquisition is worthwhile
price and what form the consideration will take b) The value of consideration is appropriate
Due diligence; fact finding exercise – time-consuming and expensive the
METHODS FOR SETTING PURCHASE PRICE buyer must ensure that the seller is:
1) Debt Free/Cash Free: a) Committed to selling the target at an appropriate price
o Consideration is set on the assumption there is no cash or debt in the b) Not currently engaged in negotiations with other potential buyers
target company, ∴ need the value of cash/debt in the target Concerns for the Seller:
o No universal definition for this method; ∴ check clients agreement The seller will wish to ensure that it:
2) Net Asset Value (‘NAV’): a) Obtains the best possible price for the target; and
o NAV is taken from the last set of audited accounts b) Targets commercial integrity not compromised (due to aborted sale)
o NAV on completion will have changed since the date of the last set of Release of Confidential Information; concern over validity of buyer
audited accounts; parties will often agree for adjustment of the intentions and commitment
purchase price based on completion accounts
MEETING PARTY CONCERNS
3) Completion Accounts:
Meeting concerns varies on the 2 types of transaction:
o Accounts that are prepared after completion; which the parties then
adjust the purchase price to reflect any update such as: 1) Private Treaty Sale; seller negotiates with one buyer
Any cash or debt left in the target at completion (Scenario 1) 2) Auction Sale; seller negotiates with several buyers
Difference between the NAV’s (Scenario 2)
o If the purchase price is to be adjusted, the parties often agree a PRIVATE-TREATY SALE PRELIMINARY DOCUMENTS
maximum amount of consideration that either; the buyer will have to
pay (price increase), or the seller will have to refund (price decrease) 1. HEADS OF AGREEMENT
4) Locked Box Mechanism: Heads of Agreement: brief non-legally binding record of the terms the two
o An alternative to using completion accounts; parties may agree to use parties have agreed to, forming the basis of the transaction
previous accounts that have be drawn up Give each party comfort as to the serious intent of the other
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, Sometimes signed before solicitors are instructed; but
4. INDICATIVE BIDS
Solicitors should ensure clients do not sign up to something they may wish
to change after a full-investigation of the target Indicative Bid: The terms the buyer is prepared to buy the Target under ∴ setting
Carry moral force – the less prescriptive the heads of terms are the more it the basis of understanding between parties (Equivalent; Heads of Terms)
aids negotiation at a later stage in the transaction A well advise seller would avoid any exclusivity agreement
Some terms are legally binding; i.e. Confidentiality & Lock-out provisions
BREAK FEE ARRANGEMENT
2. CONFIDENTIALITY AGREEMENTS
Break Fee Arrangement: A fee paid to bidder if a specified event occurs which
Confidentiality Agreement (‘CA’): Ensures sensitive business information on the
prevents the proposed purchase of the Target completing:
Target is kept confidential and used only for evaluation of the Target
Works both ways; either party agree to pay the other parties fees should
In practice, often written as a signed separate letter, but are sometimes
they cause the prevention of the purchase
included in Heads of Terms; should ensure that either are expressed as
Specified events & extent of liability; down to bargaining strength of parties
legally binding; ideally signed as early as possible
More common in relation to public than private companies
Seller and Buyer are both parties to the CA;
o Target may also be a party so that It can enforce the obligations
DUE DILIGENCE
contained within it; if not then a clause can be added to state the
Target benefits from the undertakings given by the Buyer ‘Caveat Emptor’: ‘Buyer beware’; common law rule that applies to the acquisition
Enforceable through CRoTPA 1999 of a company or business ∴ full investigation essential with the purpose to:
Seller will desire the sale of Target is confidential; knowledge/rumours
Ascertain whether the acquisition is a good commercial investment
have an unsettling effect on employee’s, clients and suppliers ∴ may
Identify potential risks; i.e. liabilities ∴ effecting transaction structure
undermine goodwill of the company
Ascertain knowledge to provide buyer with strength in negotiation
Information will inevitably need to be passed on by the buyer; to advisers,
Identify needed contractual protections (warranties/indemnities)
banks and consultants ∴ the buyer will be required to procure that persons
Establish need for (if any) regulatory consents & approvals
to whom the information is passed are also bound to treat it as confidential
Acquire knowledge on Targets business; necessary for succession
3. EXCLUSIVITY/LOCK-OUT AGREEMENTS 2 main guiding principles:
1) Share Sale Due Diligence needed to more extensive than Business Sale; the
Exclusivity Agreement: Protection for the buyer losing out to a rival bidder:
latter can be limited to specific assets and liabilities
Obtainability depends on the strength of buyers bargaining position
2) Focus on verifying assumptions that underpin the value of consideration
Walford v Miles & Another: agreement must be sufficiently certain; so as
offered by the buyer
not to constitute an agreement to agree (unenforceable); ascertained by
ensuring the agreement is:
LEGAL DUE DILIGENCE
o For a fixed or specified period; and
Private-Treaty Sale:
o Supported by consideration (or made under seal - deed)
Agreement can be a separate agreement or included in the Heads of Buyers solicitor send a ‘Due Diligence Questionnaire’ to Seller solicitors
Terms; the latter must state that it is legally binding Seller solicitor send information in response to the questionnaire, or set up
a ‘data room’ for the Buyers solicitors to access and review
AUCTION SALE PRELIMINARY DOCUMENTS Buyers solicitor then produce a Due Diligence Report
Auction Sale:
1. CONFIDENTIALITY AGREEMENT Seller and Sellers solicitors set up a ‘data room’ about the Target which
selected bidders will be able to access and review
Confidentiality Agreement (‘CA’): Ensures sensitive business information on the
Target is kept confidential and used only for evaluation of the Target:
FINANCIAL DUE DILIGENCE
Relevant to Auction Sales as well as Private Treaty Sales
Buyer appoints a firm of accountants to carry out Financial Due Diligence review
All potential bidders will be required to sign CA’s
and produce an ‘Accountants Report’; including an analysis of the Targets:
Drafted to state the agreement is for ‘the benefit of the future owners of the
Target from time to time’, as well as the current owner (seller) Past trading history;
o Under CRoTPA 1999 this allows the successful bidder to enforce the Current trading position;
agreement against the unsuccessful bidders; confers the benefit to Trends regarding profits and margins;
the new owner (successful buyer) Forecast trading results;
Suppliers and clients;
2. PROCESS LETTERS Main competitors;
Tax affairs;
Process Letter: letter sent to potential Bidders identified by the Broker at the
Accounting systems & financial controls; and
start of the process, after confidentiality agreements have been signed. Sets out
Management Structure;
the procedure and timing requirements for the proposed auction sale, including:
To avoid duplication between legal and financial due diligence ∴ saving time and
A list of details for the bidders to provide in their indicative bids to be sent
expense; the buyer should set out clearly in a letter of engagement the matters
later (i.e. details of their finance sources, confirm what they are offering to
on which the accountants are required to report
buy, provide information for competition and timing purposes.
o Assists the seller in the analysis is appropriateness of the bids
COMMERCIAL DUE DILIGENCE
Process Letter would usually contain a clause stating that any confidential
information that has been received would have to be returned to Seller if Depending on the nature of the Target; the buyer may also wish to acquire:
the bidder is unsuccessful. Environmental Report
Report on Targets occupational pension scheme;
3. INFORMATION MEMORANDUM Report on insurance risks or statutory insurance requirements;
Information Memorandum: document containing enough information on the IT and/or IP Report; and
Target to give the bidders a basis for their indicative bids. Market Research Report
Transitional Service Agreement:
o No equivalent memorandum in a Private Treaty Sale
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, o Often companies in the same group rely on each other for products A further restriction applies to the financial promotion of material:
and/or services at a preferential rate 1) Financial Promotion: s.21 FSMA
o This agreement allows that relationship with the Target to continue A person must not in the course of business communicate an invitation or
for a specified period following completion, to allow the buyer inducement to engage in investment activity, unless:
sufficient time to make alternative arrangements a) He Is an authorised person; or
b) Promotion content has been approved by an authorised person
VENDOR DUE DILIGENCE In a share sale, the Information Memorandum may constitute a financial
Becoming increasingly common; Seller provides a due diligence report on the promotion under s.21.
Target to the bidders in an Auction Sale; which they seek to rely on whilst still 2) Investment Activity: Schedule 2 Part II FSMA FPO
having access to a ‘date room’, rather than all the bidders carrying out due
Defines Investment Activity: includes shares
diligence individually
o Note: A collection of assets or a business is not an investment activity
Benefit; speeds up the process, by the report giving the bidders a focus to ∴ Business/Asset Sale: financial promotions FSMA not relevant
their further investigations of the Target
3) Relevant Exemptions: FSMA FPO
Provides restriction does not apply to communications that are:
2. CONSIDERATIONS, REGS AND CONSENTS o Article 19(1): Made to investment professionals
o Article 49(2)(a): Made to a body corporate with called-up share
SEE SGS2 ADVANCED DUE DILIGENCE NOTES IN STUVIA!
capital of:
SHARE SALE SPECIAL CONSIDERATIONS (SELLER) (i) £500,000; (Company with more than 20 members)
(ii) Otherwise £5 million
o Article 62(2)(b)(i) FPO related to a transaction under Article 70,
FSMA (SHARE SALE ONLY)
where relevant communication relates to a share transaction in a
On a share sale consideration must give to FSMA 2000: body corporate and either:
1) General Prohibition: s.19(1) FSMA The shares carry 50% or more of total share capital voting
“No person may carry on a regulated activity in the UK unless he is: rights; OR
a) An authorised person Together with any shares already held by the person acquiring
b) An exempt person” the shares, they carry not less than 50% voting rights AND
To determine whether a person is carrying on a “regulated activity” which In both cases, , the acquisition/disposal is between parties
requires authorisation under FSMA it is necessary to apply s.22(1) FSMA each of whom is a body corporate, a partnership, a single
2) Regulated Activity: s.22(1) FSMA: individual or a group of connect individuals
o Article 62(2)(b)(ii): where the above conditions aren’t met, the
“An activity is a regulated activity if it is an activity of a specified kind which
communication in question will still benefit from the exemption if it is
∴ Regulated Activity = Specified Investment + Specified Activity one made by or on behalf of a single individual, a company, a
partnership or a group of connected individuals and which relates to
is carried on by way of business in the UK and…(a) Relates to an investment a transaction with the aim of acquiring or disposing of shares in a
of a specified kind...” body corporate (or is entered into for the purposes of such an
3) Specified Activities: Part II FSMA 2000 RAO acquisition or disposal) and the object of the transaction may
Defines activities of a ‘specified kind’ reasonably be regarded as being the acquisition of day-to-day
o Article 14: ‘Dealing in investments as principal control of the company.
o Article 21: ‘Dealing as agent’
o Article 25: ‘Arranging deals in investments’
OTHER RELEVANT PROVISIONS
o Article 53: ‘Advising [on the merits] of investment’ PROSPECTUS
4) Specified Investments: Part III FSMA 2000 RAO
1) Prospectus Requirement: s.85(1) FSMA
Defines investments of a ‘specified kind’
Unlawful for shares to be offered to the public unless an approved
o Article 76: Shares are of specified kind
prospectus has been made available to the public before the offer is made
Note: A collection of assets or a business is not a specified o Liability; imprisonment, fine or both
investment ∴ Business/Asset sales: FSMA is not relevant
2) Exempt Offers to Public: s.86(1) FSMA
5) Exclusions to FSMA: Article 70 FSMA 2000 RAO
Exempt offers to the public include offers made to or directed at:
General exclusion that applies to all specified activities; provides a person
o Qualified investors (banks, financial institutions etc.) (Section 86(1)
will not be carrying on an activity of a specified kind if the transaction is
(aa) FSMA and PRR 1.2.3R Article1(4)).; or
one to acquire or dispose of shares in a body corporate and:
o Fewer than 150 people
a) The shares being sold/bought consist of 50% or more of the voting
Exemption being relied on should be made clear
shares in the body corporate; OR
b) The shares, together with shares already held by the buyer, consist MISLEADING STATEMENTS I.E. INFO MEMORANDUM
of at least 50% of the voting shares; AND
Misleading Statements: s.89 Financial Services Act 2012 (SHARE SALE ONLY)
c) In either above case, the acquisition/disposal is between parties each
of whom is a body corporate, a partnership, a single individual or a S.89(1) FSA Provides it is a criminal offence for a person to:
group of connect individuals a. Makes a statement he knows to be materially false/misleading;
If the above conditions are not met; the exclusion may still apply if the b. Makes a materially false/misleading statement recklessly; or
‘object of the transaction may nevertheless be regarded as being the c. Dishonestly conceal any material facts in connection with a
acquisition of the day to day control of the company’ statement
Art 28 FSMA RAO - (arranging transactions to which arranger is the party) – Liability; imprisonment (max 7 years), fine or both
this would potentially apply to the seller as it is one of the parties to the Claimant in a misrep. claim has a duty to show mitigation.
share sale agreement. Further liability in the Misrepresentation Act 1967 & Fraud Act 2006
Smith New Court case – shows s.89 in action. The seller’s brokers were
RESTRICTIONS ON FINANCIAL PROMOTION found to have been guilty of fraudulent misrepresentation by informing one
bidder that there was a number of other bidders interested in buying the
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