LPC Private Acquisitions Notes - Distinction 2020

,1. Private v Auction Sales
2. Share Sales – Preliminary Considerations
3. Due Diligence
4. Consideration and Tax
5. Allocation of Risk
6. Asset Sales
7. Tax on Asset Sales
8. Private Equity and Management Buyouts
9. Contractual Protections in a Management
Buyout

, 1.PRIVATE V AUCTION SALES
Private Treaty Sale v Auction Sale
Private Treaty Sale
 Confidentiality Agreement:
o Target may also be a party alongside buyer and seller so it can enforce obligations.
Or can include a clause stating that both the seller and Target are to benefit from
and can enforce the undertakings given by the buyer.
o Ensures that sensitive business information is kept confidential and not used other
than for the purpose of evaluating the Target.
o Ensures that the sale itself is kept confidential.
 Due Diligence
o Buyer’s solicitors send a due diligence questionnaire to seller’s solicitors
o Seller will respond with information (or set up data room)
o Buyer’s solicitors produce due diligence report for client
 Heads of Terms: Non-binding record of what the parties have agreed for the basis of the
transaction.
 Exclusivity/Lock-out Agreement: DD is expensive and time consuming, this protects the
buyer from losing out to a rival bidder. Walford & Others v Miles & Another.
Auction Sale
 Confidentiality Agreement: All bidders will be required to sign before any information about
the Target is released to them. Seller should have right to assign the benefit of the
obligations under the agreements so the new owner can enforce against unsuccessful
bidders.
 Process Letters:
o Sets out procedures and timing for the auction sale. Lists details the bidders have to
provide to the seller in their indicative bids.
o Contains information memorandum containing info about Target.
 Blackpool and Flyde Aero Club: Invitation to submit a tender can bind the seller to consider
X’s tender
 Indicative bids: Each bidder sets out basic terms on which it is prepared to buy the Target
 Due Diligence
o Seller sets up data room
o Or seller may provide a ‘vendor due diligence’ report, saving the bidders from
carrying out their own
o Buyer’s solicitors produce due diligence report for client
 Selected bidders visit data room to do their DD - Draft acquisition agreement - 2 nd bids -
Seller selects preferred bidder - Draft disclosure letter - Exchange contracts - Complete

SELLERS PERSPECTIVE: AUCTION SALE
ADVANTAGES DISADVANTAGES
 Higher price – more bidders  Additional professional fees (negotiate with
 Better terms – SS draft documents more than one bidder) (draft all documents)
 Opportunity to control timetable (prep data room)
 Easier to demonstrate to  Management time
shareholders/creditors that they have achieved  Risk of leak of confidential information (can
best price affect employees, suppliers, customers)

, BUYER’S PERSPECTIVE: AUCTION SALE
ADVANTAGES DISADVANTAGES
 If there is only bidder (sale less popular), then  Higher price
more likely to get a cheaper price  No guarantee of success – wasted costs
 Less control of the timetable/access to data
room
 Risk of leak of confidential info (could be buying
damaged goods)
 Risk of not genuine bidders trying to get info as a
competitor (bad for a successful bidder)

, 2. SHARE SALES – PRELIMINARY
CONSIDERATIONS
Share Sale Considerations
S19 FSMA Liability
 S19 FSMA: General prohibition: no person can carry on a regulated activity unless authorised or
exempt
 S22(1) FSMA: An activity is regulated if it is of a specified kind and relates to a specified
investment
o Specified investment: Shares (Art 76 RAO)
o Specified activity: Dealing in investments as a principle (auction) (Art 14 RAO)
o Specified activity: Dealing in investments as an agent (Art 21 RAO)
o Specified activity: Arranging deals in investments (auction) (Art 25 RAO)
 Specific exclusion: If arranged through an authorised person (Art 29 RAO)
o Specified activity: Advising on the merits (Art 53(1) RAO)
 Art 70 RAO: Exclusion: Transaction to acquire/dispose of shares in a body corporate
 Shares being sold/bought = 50% or more of the voting shares; or
 Shares being sold/bought and already held by buyer = 50% or more of the voting shares
 And the disposal is between parties each of whom is a body corporate, a partnership, a
single individual or a group of connected individuals
 Even if the conditions are not met, exclusion applies where the object of the transaction
can be regarded as the acquisition of day to day control of the affairs of the body
corporate.

S21 FSMA Liability
 S21 FSMA: Financial promotions: A person must not communicate an invitation or inducement
to engage in an
investment activity unless authorised or contents of communication have been approved by an
authorised person.
o This includes the distribution of an Information Memorandum in an auction sale.
o Sch 1 Part II FPO: Types of investments subject to S21 – includes shares
 Exemptions:
o Communications made to recipients who are investment professionals (Art 19(1) FPO)
o Communications made to a high net worth company which has called up share capital/net
assets of no less than:
 £500,000 - if more than 20 members (or parent has more than 20) (Art 49(2a)(i) FPO)
 £5 million - otherwise (Art 49(2a)(ii) FPO)
o Communications related to transaction where…(same conditions as in Art 70 RAO) (Art 62(2b)
(ii))


S85(1) FSMA Requirement for a Prospectus
 S85(1): Unlawful for shares to be offered to the public unless an approved prospectus has been
made available
o Liability: Imprisonment, fine or both.