Having completed several notable deals in recent months and acting for both Seller and Buyer, it is a good time to reflect upon some of the key principles to consider when acquiring or selling Assets or Shares in a Business or Company.
When looking to acquire or dispose of Assets or Shares, there are a host of issues that may not immediately seem important, but which most definitely are. In addition, it is necessary to consider the structure of the deal at an early stage: for instance, if you act for the acquirer of shares in a target Company, and there is substantial cash in that Company, the Seller will be better to place the case into the Solicitors client account, and the Share Purchase Agreement (SPA) can be drafted so that the cash is recycled and stands as an accretion to the consideration payable for the shares. The immediate tax advantage to the Seller is that, subject to certain qualifications, this will attract the entrepreneur’s relief. It could also be used in negotiations by the Buyer to reduce the amount of the cash to be funded by the Buyer on Completion given the significant tax advantages to the Seller.
Firstly, the seller may wish to enter into non-disclosure agreements (NDA) to protect the sensitive information it owns. These documents are relatively straightforward but important from a seller’s perspective.
That completed, what then is it the Buyer is acquiring Assets of Shares? The distinction is important on a number of levels. It impacts upon the level of Due Diligence required as well as the type of agreement used and the type of warranties to be expected from the Seller within the SPA. The Seller may wish to ring-fence Assets for future investment purposes, such as real estate or land. Often these are transferred up to a Holding Company or a SASS or SIPP prior to an exit on the sale of shares of a trading company. Which course to take, i.e. assets of shares will often be decided based upon the tax implications of one or the other. It is critical that you obtain the very best Tax advice at the outset before Heads of Terms (HOT) are agreed to ensure the best deal structure. Once the structure has been agreed, HOT will be circulated for execution by the parties.
When acquiring the shares of a Company, then you take ‘warts and all’. You take on the trading history and any subsisting liability of it at Completion. Accordingly, it is imperative that both Legal and Financial Due Diligence is carried out early to flush out any potential problems with the Company. It also enables the Buyers Lawyer to design the warranties section of the SPA to suit the deal. Warranties are statements given by the Seller upon which the Buyer is entitled to rely in entering into a transaction. Accordingly, if the warranties cannot or will not be given without qualification, then this will flush out these issues at an early stage. Where due diligence highlights potential problems, it then provides an opportunity for the parties to negotiate whether indemnities should be given by the vendors. An indemnity offers financial compensation on a £1.00 for £1.00 basis in the event that loss arises after completion, without the usual common law defences such a causation, mitigation and so on. So, if liability and financial loss does present to the Buyer post-completion (usually capped for a period of years post-completion) then the Buyer has the security and protection of a vendor indemnity to pass on that liability. Assuming that the indemnity is strong (monies held as a retention or in escrow) then this may adequately protect the Buyer and enable the deal to proceed. It is therefore important that in addition to General Warranties, Tax Warranties are sought or Separate Tax Deed is entered into setting out to record that the Company and its officers have ensured correct provision and payment of tax.
When acquiring assets, the Buyer can effectively cherry-pick those they want and ignore those they don’t want. In addition, you are not buying the trading history of the Company when buying the assets. If acquiring the goodwill and assets of a business, a degree of Legal and Financial DD will still be required but limited in scope. Some limited Tax Warranties are also necessary relating to PAYE and National Insurance as well as VAT in the event that the transfer is a Transfer of a Going Concern (TOGC). Important also, in the event of a TOGC, is TUPE, which refers to the “Transfer of Undertakings (Protection of Employment) Regulations 2006. Unlike a share sale where the same legal entity exists pre-and post-deal and so no employees physically transfer, in an asset sale, the selling entity stops and then restarts with liabilities of the business up to completion remaining with the Seller but anything accruing to the new Business post completion being the acquirer’s responsibility. It is therefore important to consider whether you want certain employees to agree to settlement proposals pre-completion, or waiver letters for employees prepared to waive their entitlement to transfer in terms of employees who are remaining you will want to know the terms upon which they are employed. Whether there are any potential issues with the current employees and where this is so, appropriate indemnities from the Seller or TUPE waivers and/or Settlement Agreements in the event that there are agreed exits for some Employees.
If and when you are comfortable with the replies to Legal and Financial Due Diligence the Buyers Solicitor will commence drafting the Sale and Purchase Agreement (SPA). This will form the basis of some negotiation but so long as it is tailored to the deal the negotiation should not be too heavy. It is critical that a sensible approach to the drafting is taken to avoid incurring the parties in unnecessary legal expense.
It may be that the acquisition is being funded by a lender. Depending on the type of transaction there may be loan agreements, security and other ancillary documentation required to be entered into by the funder. Private Equity funders will require bespoke articles of association to protect them in terms of decision making, capital expenditure, future transfers of shares and so on. Again, these will be tailored to the deal.
Where the deal comprises Property and the financers require security it will often be necessary for the Lawyer to approve, complete and register that security on behalf of the Lender including carrying out property legal due diligence.
Prior to completion, it will often be necessary to negotiate the terms of a Disclosure Letter with the Sellers Solicitor. This letter enables the Seller to disclose (and thereby mitigate against any claim for warranty breach) against any matters where they cannot give a warranty absolutely. It is important from the Buyers perspective that this is kept very precise and specific. General warranties should be avoided as they can provide the Seller with a ‘get out’ in the event of a breach of warranty situation.
In addition, on Completion, ancillary documents will be required where the transaction involves Corporate entities such as Board Minutes and/or (Written) Resolutions, Stock Transfer Forms, Filing at Companies House. Important will be the acquiring entity. If it is a Limited Company, Corporate Buyer, and consists of more than one shareholder then it will be necessary to cover off the agreement between the shareholders as well as between the shareholders and the company by the preparation of a Shareholders Agreement (SHA) and Articles of Association covering off Drag and Tag rights, Variation of Class Rights in the event of none voting shares, Decision Making including borrowing power and capital expenditure and so on.
The Corporate and Commercial team at O’Donnell Solicitors headed by Director James O’Donnell has the expertise to advise holistically in partnership with other professionals. We can be contacted at our Head Office at Appleby’s Business Centre, 3 Mossley Road, Grasscroft, Greenfield, OL4 4HH or email email@example.com.