| Acquiring a private limited
company in the UK is, as with other countries, very
largely a matter of identifying all the aspects of the
transaction that need to be addressed and thereafter
ensuring that all of those aspects have been satisfactorily
dealt with, reported to the client and considered at
the appropriate time during the acquisition process.
Negotiations
One of the major points of note when commencing negotiations
in the UK is that there is no duty to negotiate in good
faith and that, while negotiations remain subject to
contract, all and any terms of the deal can be amended
by buyer or seller during the course of the negotiation.
Once initial approaches have been made, the parties
normally enter into legally-binding confidentiality
agreements protecting information exchanged during the
course of negotiations from misuse in the event that
the transaction does not proceed.
In contrast to the acquisition of the share capital
of a public limited company, where opportunities for
detailed due diligence may be limited, the prospective
buyer of a private company is at liberty to ask the
sellers whatever questions he or she deems appropriate
and for this purpose a team of professional advisors
appropriate for an investigation of the particular business
of the target company must be assembled.
The law firm needs to be able to conduct detailed investigations
into the company’s business and its assets, including
intellectual property, real estate, contractual issues,
employment insurance, litigation, competition, employment,
tax and pensions, and an incoming investor will no doubt
be able to receive introductions from his or her lawyers
to accounting, surveying, environmental and other similar
consultants as required.
Heads of terms
Terms of the deal will normally be contained in a reasonably
short heads of terms, again expressed to be subject
to contract, save for certain terms expressly stated
to be legally binding, such as a period of exclusivity
for a buyer, which it will normally consider an essential
prerequisite to incurring the expense of a due diligence
exercise.
Purchase Agreement
The purchase agreement is normally prepared by the buyer's
solicitor and will be in a form more familiar to a North
American than to a continental European, in the sense
that the purchase contract normally sets out the terms
of the transaction in full and will contain extensive
warranties. In civil law countries, contracts tend to
be shorter in form and to rely on the implied terms
of the relevant civil code. In general, cross border
contracts tend to follow the Anglo-Saxon model rather
than the civil code model.
The purchase agreement, while based upon the law firm’s
standard precedent, will be tailored specifically to
the terms of the transaction and in particular to any
issues which come to light as a result of the due diligence
process. Most particularly, the contract will deal with
indemnities (direct compensation on a pound for pound
basis) that the buyer will seek for specific areas of
potential liability that have come to light during the
course of due diligence and which the buyer can argue
it did not take into account when formulating its original
offer. Where the liability can be more precisely quantified
at the time of the acquisition, this may be reflected
in a negotiated price reduction.
Other issues that will be dealt with may include payment
by issue of the buyer’s shares (stock), deferred
consideration, retentions from the purchase price and
post completion (closing) price adjustments by reference
to completion accounts.
In addition to the local team of acquisition professionals,
the buyer’s lawyer in the UK will normally deal
with the buyer’s professional team in their home
country in explaining legal differences that may not
be familiar (such as an employment regime that is more
protective of employees than is the case in North America),
identifying issues that are particularly important to
the purchaser relating either to the nature of its business
or its style of making acquisitions and also liaising
in relation to the arrangements for financing the acquisition.
Acquisition finance may be secured on group assets or
may involve taking security over the assets of the target
company. The ability to take security over the target
company’s assets is limited by provisions in company
law prohibiting “financial assistance” except
where a “whitewash” procedure is followed.
This is fundamentally a legal and accounting process
designed primarily for the protection of creditors and
ensures that the net assets of the company are not reduced
by the giving of the financial assistance and that the
target company will be able to pay its creditors as
they fall due in the 12 months after assistance has
been given.
Negotiation of the contract will involve familiar discussions
about the extent of liability on warranties and indemnities,
both financial and in terms of time limits. An area
which is often unfamiliar to North American lawyers
is the method by which the sellers protect themselves
from liability against future warranty claims by making
“disclosure” of existing exceptions to the
warranties.
They set these exceptions out in a “disclosure
letter” and refer to matters of which the buyer
has been informed during the due diligence process and
the documents which were handed to the buyer in the
course of that.
Penningtons
Penningtons’ North American Practice Group
includes solicitors representing all the practice areas
of the firm. We have many years of experience in working
with North American law firms and their clients in making
acquisitions in the UK.
Additionally through our membership of Multilaw and
the European Law Group, we are able to work with lawyers
from member firms of those associations to deal with
multinational sales and purchases of companies throughout
the EU and elsewhere in the world.
In recent years, we have acted for UK companies in the
purchase of businesses from US sellers where those businesses
have been in several European companies outside the
UK, have acted on the acquisition of UK companies where
competition clearance has been required in the UK and
elsewhere and have dealt with sales and purchases of
UK subsidiaries both between US companies and with UK
sellers and buyers.
We relish the opportunity of dealing with our North
American contacts and we seek to expand the range of
those contacts through our membership of BABi.
As a partner in Penningtons’
corporate and commercial department, Ron Allsopp is
based in the firm’s City of London office. He
is also chairman of Penningtons’ partnership committee.
He has extensive experience of mergers and acquisitions,
the financing of private and public companies and multinational
transactions across a broad range of industry sectors.
For further information, please
contact:
Ron Allsopp
Penningtons, Bucklersbury House
83 Cannon Steet, London
EC4N 8PE
Tel: +44 (0) 20 7457 3000
Fax: +44 (0) 20 7457 3240
E-mail: allsopprj@penningtons.co.uk
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