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Summary Consolidation Notes - Corporate Transactions (Accelerated LPC)
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Everything you need to know for the Corporate Transactions Module on the Accelerated LPC. Score 89%
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By: sopwin • 3 year ago
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CT Consolidation NotesIdentify issue, set out law/market practice, apply, conclude with advice and solutions draw a diagram
Case citations are examinable
If T doesn’t own a property, parent co selling – transfer separately.
ASSET SALES VS. SHARE SALES
Asset sale Share sale
Seller Target Co Parent Co
Subsidiaries If subsidiary shares are being sold as part of If co has subsidiaries, they will remain its subsidiaries just
business sale, will become subsidiaries of buyer. with a new ultimate parent (the buyer)
If not part of assets, remains with Target (original
ultimate parent is ultimate parent)
Proceeds Goes to Target Goes to parent
Liabilities Would be left behind and no concern to buyer (but could Remain with target co of concern to buyer as would
e.g. lose supplier, damage reputation) undermine the value of the investment it’s just made
Employees Remain employed by target co (nothing changes except the
ultimate parent of the co they’re employed by)
Real property if property comprises part of business that’s sold, will
transfer to buyer, if not, stays behind (like for subsidiaries)
Tax Corporate seller – corporation tax on chargeable gains - Corporation tax on chargeable gains or capital gains tax
capital assets; including land, P&M, IP/IT – note balancing Individuals consider ER/IR (lifetime limit)
charges and allowances Deferral of tax via paper (not for individual)
Consider rollover relief on replacement business No tax on dividends for a corporate, - see SSE
assets
Seller to instruct solicitors + Buyer to instruct solicitors and
Seller to send out Information
identify prospective bidders + executee confidentiality
Memorandum + Process Letter
consider preliminary issues agreement
Seller will draft acquisition
Seller prepares data room, agreement:
reviewing indicative bids
Buyer Reviews IM/Prepares IP/Agency,
(consideration/tax), select
Indicative Bids Property/Environment,
bidders to go forward including
visiting data room Tax/group structures/
Employment/pensions
Buyer reviews AcqA, selected Seller to prepare draft disclosure
bidders will go forward with site letter, buyer will review this.
Complete
visits, 2nd/final bids = select Negotiate and agree AcqA + DL +
preferred bidder + grant other transaction documents Post-completion Integration!
exclusivity Exchange + fulfill CPs
1
, SGS I: INTRODUCTION TO AUCTION SALES
NB watch out for language. If ‘business of X is sold’ = asset sale; if ‘X is sold’ = share sale (tabbing orange)
If share sale = litigation remains with the business, but puts value of asset down would affect the purchaser
[Bilateral vs auction sales] (in exam – compare this or compare auction adv/disadv)
Bilateral Sales Corporate Auction
Confidentiality agreement Confidentiality agreements (onus is greater than in Bilateral sale)
Heads of terms Information memorandum
Exclusivity agreement Process letter – setting out process for auction, including list of
DDQ then DDR by buyer details bidders have to provide
Buyer drafts acquisition agreement o Probably after confidentiality letter with information
Seller reviews, marks up, sends disclosure letter memorandum
Negotiate + agree No exclusivity + multiple buyers
Principal Differences between them
Single buyer – exclusive from the getgo Multiple buyers
Amendments more likely Seller drafts acquisition agreement, amendments at a minimum
DDQ vs DDR Seller controls due diligence (more limited, use data room)
Buyer drafts acquisition agreement Indicative bids, before exclusivity
a. Overview of the auction sales process
Multiple prospective buyers cf. private treaty sale (single prospective buyer)
Advantages & Disadvantages for the Seller
(NB. Auction generally considered more favourable to sellers)
Wants best possible price for T + concerned about fishing/failed auctions/confidentiality breaches
Advantages Disadvantages
Reaches more buyers Inappropriate if e.g. one/two potential buyers
Maximises price/sale terms through competitive bidding Inappropriate if complicated business structure, or
(but identities/values are kept secret); can defer external issues like regulatory consents making a standard
committing to one buyer form agreement/process impractical
Has control of DD, including number/scope of documents Cost to seller higher –need finance adviser to orchestrate,
it will share with bidders + control time taken for bidders higher legal fees (documentation, multiple negotiations)
to complete investigation into T Potential for confidentiality leaks – fishing expeditions,
Can control timetable (from agreement to completion) so may leak despite NDAs
could be a lot faster than bilateral if competitive More management time involved – prolonged auction
Drafts acquisition agreement so can secure better terms process if large no. of bidders + need to coordinate
than bilateral sale, if it’s competitive – amendments will neotiations and DD
be kept to a minimum and they don’t have to commit until If no sale, failure will be public + potentially costly seen
selecting the most lucrative terms as soiled goods
Well-marketed, well-run auction demonstrates to SHs that Interrupts operations + lost sale/key staff (hard to maintain
best price was obtained confidentiality since so many parties)
Advantages & Disadvantages for the Buyer
Bidder will want preferred bidder ASAP for exclusivity, so should have available funds/complete everything ASAP/negotiate only key bits
Concerns: costs if deal falls through, who else S is talking to, commitment of seller if It’s a low price, whether DD is accurate
Advantages Disadvantages
Potentially cheaper – they don’t have to draft anything May be forced to pay higher price than if only suitor
Lower costs – don’t have to draft anything, don’t have to Potential waste of time + money bc lower chance of
pay advisers costs concluding successful deal but still carry out DD need
Quicker – transactional docs prepared earlier Higher risk bc less DD info about target business – level of
If there aren’t many competitors, can get a bargain (price warranties/indemnities lower as seller-friendly provisions
can go down, and reputation issues due to being damaged only get sensitive info later in stage + wasted DD costs
goods if the auction fails) Less opportunity to build relationships with target’s
If competitor – can obtain confidential info but this is management prior to completion
unscrupulous Greater risk of damage to target’s business bc of news of
Can change your mind (HoT is also not binding) but can sale getting out before auction process concluded
still get vv far in process before ‘hooked’ – don’t have to o Bidder = acquiring damaged goods
spend much going into data room + on info access Generally just less access to info/mgmt.
b. Preliminary considerations for buyer and seller
[Client to consider]
How much want to receive/spend, where is financing going to come from?
Any professional help?
What is the ultimate goal? Any must-haves? Deal-Breakers?
2
, Will there be a particular date? How long will it be? Any delays to incorporation?
Can target operate independently from the group, or is TSA required?
o Seller can provide services for a short while (but more for private equity who don’t have the nec infrastructure)
c. Stages of an auction sale
[Overview of process]
[1. Preliminary considerations]
Establish deal team: legal, accountants, financial adviser
o Financial adviser manages the process, will prepare IM/process letter
Identify prospective bidders
o E.g. same industry, expressed prior interest
o Considerations re: competition, SH approval, financing, post-completion operations, any regulatory consents
Confidentiality agreement to prospective bidders before IM/process letter
o Confidentiality agreement is the first doc that people see in auction process because higher risk of leak of confidential info
Process letter/IM sent out after confidentiality agreements executed and returned
o Cf. PTS – there’s no head of terms here
o Process letter sets out procedure/timing – including presentations, site visits
o IM sent along with it – giving basic info e.g. assets, trading history, employees
Preliminary indicative bids will be submitted based on the IM and seller weeds out fishing expeditions
Seller prepares DD and puts it in data room
o Reduces risk of misrepresentations – can use vendor DD reports (accountants) to speed up the deal
o Successful bidder can rely on information here – subject to limitations e.g. liability cap
o Virtual data rooms are more typical now (physical for really sensitive one) – password access + can track usage
[2. Investigation]
Preferred bidders selected and invited to review data room
o Confidentiality – only want the serious ones. May show off site and have mgmt. presentations
[3. Negotiations]
Seller drafts AcqA and submits to bidders for review + mark-up by shortlisted bidders
o Cf. PTS – buyer drafts AcqA
o Good because seller has upper hand but also costs involved on seller’s end!
Bidders prepare and submit second or final bids including AcqA mark-ups based on DD investigations, and review of the AcqA
Seller provides draft disclosure letter (general disclosures may be provided alongside the draft AA)
Preferred bidder selected/exclusivity agreement (if given)
o Cf. PTS – exclusivity agreement much earlier on
o Break fee might be there – if you don’t go ahead with the agreement, it’s going to cost you
o A bidder can reserve position on certain issues ‘pending additional DD’ – until preferred bidder status
Preferred bidder then negotiates transactional docs like agreement/disclosure letter with seller and completes
o Seller drafts (not buyer as in private treaty sale) – will consider conditions of bids, price, amendments, bidder’s track record
in completing deals, risk assumptions
o Exclusivity doesn’t prevent deal from failing, but encourages a tighter timescale/dedication
Seller can break from exclusivity if bidder’s offer changes materially
Sometimes can have break fees in a seller’s market (if you don’t go ahead, will cost you!) – this is very rare and if
a bidder agrees it’s more a sign of commitment
More conventionally – seller agrees to pay bidder’s costs if seller decides to sell to somebody else
o Very hard to revive negotiations with second choice bidder so ensure that any DD issues etc are dealt with promptly +
resist efforts to introduce new points or delay process
[4. Completion]
Sale is completed with preferred bidder, usually virtually
o Simultaneously – immediately after signing acqa (simultaneous) or
o Split exchange/completion where the acqa has CPs that must be satisfied at a later date
Main contractual documents: BMs, SH resolutions, will depend if asset vs share sale
Unsuccessful bidders return and/or destroy all confidential information
o Don’t know that you’re unsuccessful until completion, so this has to be after completion
[5. Post completion]
Paying stamp duty, filings/registration – bibles of final form transaction documents
Other considerations
o Manage staff impact – special bonuses to keep them committed, ensuring bidders contact only key/selected employees
o If this is MBO, cooperation is maintained due to COI – consider their bid at a later stage when other bidders have more info
o Could negotiate W&I insurance – negotiable (seller won’t need to place funds in escrow, bidder accepts lower cap on W&I)
3
, [Managing the bid process]
Should not overstate the degree of interest or terms offered to maximise competitive tension
o can be liable for fraudulent misrepresentation EI losses not foreseeable – Smith New Court Securities
Seller cannot simply disregard bids abide by rules and procedures comm to bidders!
o Blackpool and Fylde Aero Club: legal obligation to consider all bids made in accordance with terms of process letter
o IM + process letter should not be an offer capable of acceptance, bidders ensure their offers ≠ binding contract until later
[Preliminary documents]
[Confidentiality agreements]
Most relevant – buyers will want to learn all about the target, to ensure it is worthwhile/worth consideration being asked for
Information means risk of leaks so confidentiality agreements are needed before any information is released
o Should be for the benefit of owners of T, from time to time (for benefit of current owner)
o So the successful bidder can enforce obligations in this confidentiality agreement against unsuccessful bidders
Doesn’t wholly negate the worry so withhold really key info until much later; redact, summarize, oral presentations
[Process letters and Information Memorandum]
Process letter – it is an invitation to treat (offer to receive tenders) so no obligation to accept highest bid – sole discretion lies with
seller in deciding who to invite forward or whether it accepts a particular bid, highest or otherwise
o Sent after executed confidentiality agreement has been signed, together with the information IM
o Sets out procedure, timing, process, what bidder should include in bids so they can see who’s committed/able to complete
Can elicit info from the answers – e.g. competition/regulatory issues that might slow the transaction down
Ask about B’s share of the market, to ensure no merger control issues and sources of financing to see if can
complete + intended structure of the sale – want confirmation they’re happy with a share sale
o Remember Blackpool – must consider bid, but seller has sole discretion in selecting preferred bidders
Information memorandum – usually enclosed with process letter (and cf. PTS – won’t see it there)
o Contains just enough info about T to give bidders a basis on which to make indicative offer or bid for T
o Will include:
A description of the target business, including its industry, trading history and principal assets.
Up-to-date and historical financial information and projections.
Information about mgmt. + employees, including the senior management team and board of directors.
Depending on commercial sensitivity, information about major customers and contracts.
o Important Notice – disclaimer that recipients should make own queries, and no rep/warranty about its adequacy/accuracy
or reliability and only for sophisticated investors so no FP
[Indicative bids]
Basic terms it’s prepared to buy, based on the IM, and other public domain info
[Confidentiality agreement]
[Why the concern about confidentiality?]
Drives down price
Disruption to business and employees (employees might leave)
Suppliers might not renew supply agreement
Competitors might be aware of info
Think: what extent can bidders rely on this? If there isn’t one provided, work on your knowledge of confidentiality and apply
[What should confidentiality agreement include?] See example SGS 1 Activity 2
Notice if breach is unrealistic
Obligations
o Have to keep the information secret – substantive/operative provision
Burden on the bidders – as soon as you become aware of a leak, you have to notify them of a breach
o Can only use for permitted purpose
Would as a rule of thumb keep this as narrow as possible – generally relate to value of T
o Can’t make any copies of the information, ensure nobody accesses unless permitted persons
o Returning + destroying material if unsuccessful or requested by seller (including other people who had access to material)
Seller will want to enforce this at any time e.g. if you have an indicative bid but you don’t think that bidder is
serious (‘whole agreement and conduct’ section)
Definition of confidential information (and definition of Target co + Group)
o Any Info passed from sellers to bidders
o Excluding that in the public domain, or anything found on the S that’s not from them (and that source wasn’t under a NDA)
And excluding what they knew before the date of the agreement + whatever is agreed won’t be confidential
Must be some person that confidential info can be passed onto (since you can’t control third parties)
o E.g. the board, lawyers, accountants – you would want them to be bound by this so get bidder to abide by the NDA as if
they had signed it themselves otherwise you have to sign confidentiality agreements with everyone included
o Should be defined as ‘Permitted Recipient’
o NDA – between permitted recipients on terms no less onerous + back to back obligations on bidder + TP advisers
4
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