Consolidation – (Workshop 1) – Preliminary Matters
By the end of this Unit you should be able to:
1. Analyse the commercial and legal benefits of alternative forms of acquiring or selling a
business based on a set of case study facts.
2. Identify preliminary matters to be dealt with at the outset of an acquisition including
drafting/negotiating preliminary documentation.
When you buy a company; would you prefer asset or share sale?
Share sales– less complicated because you’re transferring the entire shares (property,
contracts, employees) which will be attached to the shares of the company (company itself)
whereas in
Asset sales - you’re having to transfer all of the underlying assets individually depending on
how its structured so potentially more onerous to move individual assets.
(N.B. there are pros and cons for both and depends on the deal and how it’s been
structured)
Professional conduct point
If buyers and sellers both say they want to do a share seller as a lawyer you will want to ask
them why they want to proceed with that as a professional conduct point, better to suggest
it at an acquisition so they’ve at least thought about it so they can make an informed choice.
As a lawyer have to state if you do it this way, these are the pros and cons and if you do it
that way, these are the pros and cons.
After doing pros and cons of share and asset sale + they say after committing to doing share sale the
docs that will kick things off is:
1. Letter of intent/heads of terms – sets out the main points of agreement and basis on which
they are prepared to proceed such as price, parties
2. Confidentiality/NDA – sets out parties’ obligations in relation to confidential info during DD;
used to protect seller as they are most at risk of potential misuse/release of sensitive info,
although parties will want to keep the terms and existence of the deal confidential;
confidential info would include financial info, tax info, competitors/suppliers/customers,
trade secrets and litigation involved that’s not in public domain already
Exclusivity of negotiations
More important to buyer to ensure that the seller doesn’t negotiate with other parties
(potential buyers); usually the buyer has already put up a lot of costs, time + resources with
investigating the company
Considering clearances from authorities
Let’s say we’ve got this deal on the table and we need to ascertain some clearances as this
will affect timeline of deal/acquisition
Competition clearances – might be part of a deal that you need to hive off certain assets for
the deal to proceed or that if you buy this business you’re not going to have too much of
market share/monopoly in a certain industry and get in trouble with CMA
, Issue with monopolies – not enough diversification, less innovation, as no other supply
leads to increased prices for consumers
Environmental clearances – say you’re buying oil refinery issues; issues in terms making sure
certain controls are in place from an environmental point of view; cleaning up materials
Prep task 1
Target – Alpha (Ltd company) with Ds (directors) and SHs; has fully owned subsidiary (Alphacom
Research Limited – (market research – cost of fb ads v instagram ads)
Business of target: advertising, marketing
SHs – Gandover Holdings (Ltd company) (80%); Silvertree Trustee Ltd (10%) and 3 Ds who
are also SHs (Kalusha Chitalu (3.3%); Simon Forster (3.5%); Sarah Gardner (3.2%)
Buyer of Target - Rethink (Ltd company); fully owned by Benham Warstein, Inc (US Corporation)
Has got all advertising and PR subsidiaries
Want to add Alpha to their portfolio of subsidiaries
Assuming it’s a share sale, how would this be illustrated?
As a cash deal, the consideration is going to the shareholders of Alpha in exchange for their
shares and this will include Alpha’s subsidiary (Alpha research) as its just another of the
company’s assets unless they structure it differently
Company transfers over once you got the shares
Assuming it’s a asset sale, how would this be illustrated?
In this case, Rethink is buying particular assets of Alphacom (target) that you’ve cherry
picked ((i.e. property/offices) and in return for assets, not giving money to SHs but to
company, Alphacom in return of assets
Pros and cons of asset and share sale
Share sale
+ Trading continuity – can still carry-on business as it is, you’re acquiring package deal with
customers and suppliers; got all the properties and liabilities and all trfs over with the shares (N.B.
has its own pros and cons) (Pro from buyer’s perspective)
+ More extensive warranties + indemnities in share sale - Want a comeback on promises
(warranties and indemnities), protection more extensive on share sale from buyer’s perspective
because you are taking all assets and liabilities (including tax liabilities which you won’t automatically
do on an asset sale) so need more protection as opposed to assets where you can cherry pick
+ Easier to transfer - just need STF in a SPA as opposed to asset sale (Pro from buyer and sellers
perspective)
+ CGT relief – Target (seller) gets ER if individual shareholder disposing of shares; if it’s a company,
for corp tax purposes, the seller can be exempt for paying CGT on gains from sale of shares in
company under the substantial shareholding exemption (pro from seller’s perspective)
+ Set off trading losses for income tax – say you bought widgets for 25 and sell for 5, can count
against that loss by offsetting from future profits as long as you’re doing same type of business; big
By the end of this Unit you should be able to:
1. Analyse the commercial and legal benefits of alternative forms of acquiring or selling a
business based on a set of case study facts.
2. Identify preliminary matters to be dealt with at the outset of an acquisition including
drafting/negotiating preliminary documentation.
When you buy a company; would you prefer asset or share sale?
Share sales– less complicated because you’re transferring the entire shares (property,
contracts, employees) which will be attached to the shares of the company (company itself)
whereas in
Asset sales - you’re having to transfer all of the underlying assets individually depending on
how its structured so potentially more onerous to move individual assets.
(N.B. there are pros and cons for both and depends on the deal and how it’s been
structured)
Professional conduct point
If buyers and sellers both say they want to do a share seller as a lawyer you will want to ask
them why they want to proceed with that as a professional conduct point, better to suggest
it at an acquisition so they’ve at least thought about it so they can make an informed choice.
As a lawyer have to state if you do it this way, these are the pros and cons and if you do it
that way, these are the pros and cons.
After doing pros and cons of share and asset sale + they say after committing to doing share sale the
docs that will kick things off is:
1. Letter of intent/heads of terms – sets out the main points of agreement and basis on which
they are prepared to proceed such as price, parties
2. Confidentiality/NDA – sets out parties’ obligations in relation to confidential info during DD;
used to protect seller as they are most at risk of potential misuse/release of sensitive info,
although parties will want to keep the terms and existence of the deal confidential;
confidential info would include financial info, tax info, competitors/suppliers/customers,
trade secrets and litigation involved that’s not in public domain already
Exclusivity of negotiations
More important to buyer to ensure that the seller doesn’t negotiate with other parties
(potential buyers); usually the buyer has already put up a lot of costs, time + resources with
investigating the company
Considering clearances from authorities
Let’s say we’ve got this deal on the table and we need to ascertain some clearances as this
will affect timeline of deal/acquisition
Competition clearances – might be part of a deal that you need to hive off certain assets for
the deal to proceed or that if you buy this business you’re not going to have too much of
market share/monopoly in a certain industry and get in trouble with CMA
, Issue with monopolies – not enough diversification, less innovation, as no other supply
leads to increased prices for consumers
Environmental clearances – say you’re buying oil refinery issues; issues in terms making sure
certain controls are in place from an environmental point of view; cleaning up materials
Prep task 1
Target – Alpha (Ltd company) with Ds (directors) and SHs; has fully owned subsidiary (Alphacom
Research Limited – (market research – cost of fb ads v instagram ads)
Business of target: advertising, marketing
SHs – Gandover Holdings (Ltd company) (80%); Silvertree Trustee Ltd (10%) and 3 Ds who
are also SHs (Kalusha Chitalu (3.3%); Simon Forster (3.5%); Sarah Gardner (3.2%)
Buyer of Target - Rethink (Ltd company); fully owned by Benham Warstein, Inc (US Corporation)
Has got all advertising and PR subsidiaries
Want to add Alpha to their portfolio of subsidiaries
Assuming it’s a share sale, how would this be illustrated?
As a cash deal, the consideration is going to the shareholders of Alpha in exchange for their
shares and this will include Alpha’s subsidiary (Alpha research) as its just another of the
company’s assets unless they structure it differently
Company transfers over once you got the shares
Assuming it’s a asset sale, how would this be illustrated?
In this case, Rethink is buying particular assets of Alphacom (target) that you’ve cherry
picked ((i.e. property/offices) and in return for assets, not giving money to SHs but to
company, Alphacom in return of assets
Pros and cons of asset and share sale
Share sale
+ Trading continuity – can still carry-on business as it is, you’re acquiring package deal with
customers and suppliers; got all the properties and liabilities and all trfs over with the shares (N.B.
has its own pros and cons) (Pro from buyer’s perspective)
+ More extensive warranties + indemnities in share sale - Want a comeback on promises
(warranties and indemnities), protection more extensive on share sale from buyer’s perspective
because you are taking all assets and liabilities (including tax liabilities which you won’t automatically
do on an asset sale) so need more protection as opposed to assets where you can cherry pick
+ Easier to transfer - just need STF in a SPA as opposed to asset sale (Pro from buyer and sellers
perspective)
+ CGT relief – Target (seller) gets ER if individual shareholder disposing of shares; if it’s a company,
for corp tax purposes, the seller can be exempt for paying CGT on gains from sale of shares in
company under the substantial shareholding exemption (pro from seller’s perspective)
+ Set off trading losses for income tax – say you bought widgets for 25 and sell for 5, can count
against that loss by offsetting from future profits as long as you’re doing same type of business; big
