Business Law

Acquisition of limited companies | Business Law – SQE1 & SQE2 Examination

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Acquisition of limited companies
• Market value – for listed companies
• Book value – balance sheet value of assets
• Break-up value of assets – value of assets after they were all sold and liabilities paid
• ‘Going concern’ – valuing the company as a money generating business rather than
merely the sum of its assets
• Future cash flows – take present value of a number of years of future profits/cash
How you acquire the business of a company limited by shares
1. Acquire all of the shares (share sale) – Buyer purchases some / all of the issued
shares in the target company
2. Acquire a (part of the) business of the company as a going concern, i.e. including
assets + goodwill (asset sale / business sale) – Buyer purchases whole / part of
business / trading division as a going concern, such that business continues to trade
after completion as prior to completion
o NB each asset needs to be transferred separately + have part of purchase
price apportioned to it
i. TR1 for transfer of property
ii. Assignment / Licensing for IP
iii. Contracts assigned / novated
iv. Employees transfer under TUPE
o Following sale of whole of business, selling company is a ‘cash shell’, a
company with no assets except the cash proceeds of the asset sale
3. Purchase the particular assets that you require (sale of assets)
Acquisition of a partnership / sole trader
• Only option is an asset sale (going concern) or individual sale of assets
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• Asset sale:
o Buyer/purchaser = purchasing company / partnership / sole trader
o Seller/vendor = selling company / partnership / sole trader
• Share sale
o Buyer/purchaser = purchasing company / partnership / sole trader
o Seller/vendor = selling shareholder
Share Sale vs Asset Sale
Share sale
Advantages for seller (who usually always prefer share sales)
• Clean break from business
• Potential tax exemptions for individual sellers => ER available on capital gain, rather
than money received by company (taxed corporation tax) and then paid as a
dividend (taxed as income)
• Likely quicker as no need to spend time assessing which parts of business sold
Advantages for buyer
• Entire company (assets + liabilities) purchased = simpler (no need for separate deeds
for different assets acquired) and therefore less logistically expensive transaction
than a complex asset sale + often quicker
o Although NB: as buyer purchasing target together with its liabilities, more
costs will be spent on DD + negotiating additional warranties / indemnities
• Certainty that it acquires all the assets required to run the business
• No need for third-party consents to the assignment / novation of existing contracts,
other than perhaps change of control provisions in financing documents
• May require warranties and indemnities from seller
• Less disruption = continuity of ownership of property + employment of employees
(may transfer under TUPE)
• Tax advantages
Asset sale
Advantages for the buyer (who usually prefer asset sales)
• Buyer does not assume the liabilities of the company – buyer can cherry pick what
assets (and/or liabilities) it would like to purchase
• Tax advantages
• Less DD needed, as less concerns re: tax + litigation liabilities
• No stamp duty
Advantages / disadvantages for seller
• May allow seller to sell off loss-making / non-core division, retaining more profitable
parts of the business
• However, seller will be unable to transfer assets and/or liabilities that it no longer
wants to the buyer unless the buyer wishes to purchase them
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• Confidentiality agreement – before giving sensitive information / beginning
negotiations about the seller or target, the seller will ask the buyer to enter into NDA
o Consideration = providing information regarding target/seller + agreement to
keep such information secret (often continuing indefinitely, even if
transaction does not complete)
• Mutual confidentiality undertakings – usually requested by buyer from seller in so
far as seller obtains any confidential information re: buyer
• Heads of agreement / Heads of terms –expression of non-binding intention of the
parties as to key commercial terms and structure of the deal
o Where no NDA, any confidentiality + exclusivity/lock-out clause (i.e. seller not
to solicit offers for the target if completion within a certain time) in the
Heads of agreement must be expressly stated to be legally binding
§ Lock-in clause requiring seller to negotiate with buyer =
§ Lock-out clause requiring seller not to negotiate with others =
enforceable, provided sufficiently certain
• Due Diligence reports – caveat emptor => buyer must obtain necessary information
through due diligence questionnaire and/or review of a data room including relevant
documentation relating to target company
o Lawyers = legal DD
o Accountants = financial, accounting and tax DD
• DD reports highlight areas of concern + advise further action:
o Reduction in purchase price
o Further warranties / indemnities
o Consider asset sale
o Escrow sale proceeds
o Withdraw
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• Acquisition agreement (Share Purchase Agreement for share sale – SPA) – draft first
produced by buyer’s lawyers during / after DD for negotiation
1. Consideration – amount + form (cash / shares) + timing (portion may be held
in escrow until expiry of time for making indemnity claims) + apportionment
of sale monies between assets (where asset sale)
2. Warranties – statements of fact made by seller re: target => accounts,
employees, IP, real estate, contracts, trading arrangements, disputes +
§ Liability for breach of warranty usually limited by vendor protection
provisions and contents of disclosure letter
3. Indemnities – promises made by seller to reimburse buyer for any loss in
connection with contingent liabilities
§ E.g. indemnification re: legal costs of action threatened by customer
4. Seller protection provisions (often added in / drafted by seller’s lawyers)
– limit seller’s liability for breach of warranty claims =>
§ Time limit
§ Upper limit on damages (‘de maximus’)
§ Lower level below which claims cannot be brought (‘de minimis’)
§ Detailed procedure for bringing a claim by buyer
5. Arrangements for completion– where not simultaneous exchange and
completion (i.e. CPs to satisfy) = split exchange and completion => acquisition
agreement specifies issues to be dealt with by and at completion
§ Completion BM of buyer + seller + target (often done on exchange)
§ Agreements that need to be executed
• Disclosure letter – seller’s liability for breach of warranty limited by contents of
disclosure letter => seller gives details of any matters which make the statements of
fact given in the form of the warranties untrue (i.e. qualifying warranties)
o General disclosures (‘front-end’ of disclosure letter) – seller seeks to ensure
that anything buyer could have found by conducting public searches
(Companies House / Land Registry) is deemed to have been disclosed
o Specific disclosures (‘back-end’ of disclosure letter) – relate to specific
warranties given
§ E.g. warranty that no litigation true, but for one small piece of
litigation, details of which are given in specific disclosure
Other completion documents
1. Service agreements – directors / managers of target
2. Tax deed – indemnity from seller in relation to tax issues (share sale)
3. IP licences / assignments
4. Notation / assignment agreements – transfer of third-party contracts (asset sale)
5. Completion board minutes – target, buyer + seller
6. Statutory forms – changes to target’s registered office / directors / auditors etc.
7. Transitional services agreement – services provided by parent / sister continue for
short period after completion to ensure no problems in continuity of trading
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Liability under warranties where > 1 warrantor
• Joint and several liability – warranties usually given on joint and several basis = each
seller assumes the obligation collectively + individually => buyer may sue any one or
more of the sellers for the whole or part of the loss
o Civil Liability (Contribution) Act 1978 – joint warrantors may seek
contribution from others liable for same damage + court evaluates
apportionment based on what is just and equitable
o Alternatively, sellers may enter into a ‘Contribution Agreement’ => does not
affect buyer’s right to choose who to pursue, but may cap contributions from
certain shareholders (e.g. minority shareholders)
• Several – each seller liable for agreed specified proportion of potential damages =>
buyer brings individual proceedings against individual sellers
• Joint – similar to joint and several, except that:
o Death of party jointly liable releases his estate from the liability
o Buyer must usually issue proceedings against all sellers
• Simultaneous exchange and completion => buyer and seller + representatives meet +
sign acquisition documents + hold relevant completion BMs
o There may be some last-minute negotiation
• Split exchange and completion => completion a mere formality (usually on phone)
• Statutory filings
• Updating statutory books
• Payment of stamp taxes
• Compile ‘bible’ of copies of executed completion documents
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Financial assistance
• Where target public company / has subsidiary which is a public company, must
ensure there is no illegal financial assistance in the course of financing the
o It is no longer unlawful for private companies to give financial assistance in
relation to the acquisition of their own shares / shares in their private holding
Requirements for transaction to be prohibited
1. Acquisition of shares (transfer or issue, but NOT asset sale)
2. Company to which prohibition applies – Identify the target company + determine
whether public (= s 678) or private (= s 679)
a. If target = public (S 678(1) &(3)):
i. Prohibition on assistance applies to target company
ii. Prohibition on assistance applies to subsidiary of target company,
whether public or private
b. If target = private:
i. S 679(1); (3) – prohibition on assistance applies to any public company
subsidiary of the target
3. Gives financial assistance (s 677)
a. Financial assistance given by way of gift (s 677(1)(a))
b. Financial assistance given by way of guarantee, security or indemnity, release
or waiver (s 677(1)(b))
c. Financial assistance given by way of loan or similar agreement (s 677(1)(c))
d. Any other financial assistance given by a company where the net assets of
the company are reduced to a material extent by the giving of the financial
assistance or the company has no net assets (s 677(1)(d))
4. Directly or indirectly
5. Either
a. Before or at the same time as the acquisition, for the purpose of the
acquisition (s 678(1); s 679(1)); or
b. After the acquisition for the purpose of reducing or discharging a liability
incurred for the purpose of the acquisition (s 678(3); s 679(3))
Exception 1 – purpose
• S 678(2), 678(4), 679(2), 679(4) set out the ‘purpose exception in relation to s 678(1),
678(3), 679(1), 679(3) respectively
• Purpose exception = financial assistance not unlawful if principal purpose in giving it
not for purpose of acquisition / acquisition only an incidental part of some larger
• Very limited application
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Exception 2 – unconditional exceptions
• Specific types of transactions exempt from prohibitions:
o Dividend payments (s 681(2)(a))
o Share buy-backs (s 681(2)(d))
Exception 3 – conditional exceptions
• Specific types of transactions exempt from prohibitions provided certain conditions
o Money lending in ordinary course of business (s 682(2)(a))
o Assistance in respect of employee share schemes (s 682(2)(b))
• Conditions (s 682(1)):
o Company giving assistance is a private company; or
o Company giving assistance is public company and net assets of company not
reduced by giving of the assistance / assistance provided out of distributable
Consequences of carrying out prohibited financial assistance
• S 680 – breach is an offence which can lead to penalties for:
o The company (a fine); and
o The officers of the company (fine / imprisonment)
• Transaction amounting to prohibited financial assistance would be void and the
wider transaction may be void as well
Financial assistance under CA 1985
• CA 1985 provisions repealed in relation to private companies on 1st October 2008
• Relevant date = date of the transaction
• S 151 CA 1985 – prohibition applied to target company (whether public or private)
and any subsidiaries (whether public or private)
• Where an unlawful transaction took place, private companies were able to use the
“whitewash” procedure to render the transaction lawful (must have been at the
time of the transaction, and cannot be done retrospectively), provided:
o SR
o Directors’ statutory declaration of solvency
• Consequences of breach the same as under CA 2006


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