Consolidation notes covering the entire Private Acquisitions module.
/!/ These notes have been restructured to optimise exam performance and thus are in table formats /!/
/!/ These notes were written during the academic year and thus may need to be supplemented/ amended to include any new le...
Private Acquisitions– Consolidation
Introductory remarks
• Acquisitions can be structured in one of two ways, depending on whether you are acquiring the share capital of a Co, or the assets of a business.
The main + or – of one or the other will be the primary reason for doing one method and not the other
Share Sale - the purchase of a Co by means of a share sale Asset Sale - the purchase of a business by means of an asset sale
Referred to on this module as sale of a Co Referred to on this module as sale of a business
Buyer purchases the issued share capital (ISC) of a Co - target Co does not Buyer purchases the whole of the business of a Co as a ‘going concern’ or buys one or more trading divisions as a going
change but merely continues to trade with new SH (new owner). concern.
Buyer acquires the target Co with all its assets and liabilities. • ‘Going concern’: acquiring the whole of the business or large proportion of assets and goodwill so that business can
trade.
Consideration is paid to the selling SH.
Each asset has to be transferred separately with part of the purchase $ apportioned to it. e.g., IP assigned, property transferred
(via form TR1), contracts assigned or novated. As such, the buyer can ‘cherry pick’ the assets and liabilities it wishes to be
transferred with the business.
Consideration is paid to the selling Co which results in a dividend being declared or wound up by SH to pay SH
!/! this is not a sale of some assets which are collectively insufficient to constitute a business as a going concern.
• They are concluded in two parts: (1) Exchange (signing) and (2) Completion (closing) which happen either simultaneously or separately (e.g., if external consents are required)
• Business sales and share sales can adopt one of two routes:
Bilateral transaction whereby the Seller negotiates the transaction with a single prospective buyer. Seller seeks bids for the Target Co or business from several prospective buyers in a competitive tender
process.
Early stages
As stated above, in a share sale or business sale, the seller will have a choice between two main routes to sale:
• Private Treaty Sale
• Auction Sale*
Advantages vs. disadvantages
Seller Buyer / Bidder
Advantages Seller can reach a larger pool of potential buyers There are relatively few.
Competitive process maximises the price by encouraging potential One may be if there is very little or no interest in the auction,
buyers to bid against each other the Seller may sell cheaply in order to dispose of the Target.
Seller should be able to secure better sale terms than might be achieved
on a private treaty sale due to the competitive process and the fact that
the Seller’s solicitors get the first draft of the AA
Seller controls DD including the number and scope of the documents it
will share with participating bidders.
Seller controls the transaction timetable.
Can enable D to demonstrate to SH and creditors that the best possible
$ has been obtained for the Target Co or business.
Disadvantages Not all businesses are suitable for sale by auction: The successful bidder may end up having to pay a higher price
• if the market sector is limited and there are only one or two for the Target as a result of the competitive tendering process
potential buyers.
There is a risk of CI being released to unscrupulous
• if the business is structured in a complicated way competitors which may reduce the value of the Target in the
successful bidder’s hands
• if there are competition or other concerns
There is a risk of wasted costs as there is no guarantee of the
Seller’s transaction costs are higher due to: bid succeeding
• the engagement of an investment bank or other corporate
finance adviser to orchestrate and advise on the auction
process.
• the engagement of lawyers to draft the transaction
documents and potentially negotiate with various buyers
Requires significant management time commitment by the seller.
• Management may be distracted from their duties due to the need
to conduct DD and negotiate with multiple bidders
Disrupts the conduct of business which may result in lost sales and staff.
Some bidders may only be interested in finding out information about a
competitor, so it is normal to withhold certain sensitive information until
later on.
Failure to secure a sale will be public.
Auction Sales – deep dive
Key stages in an auction sale
Establishing the deal team and each member’s R, incl. legal advisers, accountants, etc.
!/! the phases involved can
vary deal to deal based on the Invitation to bid to bidders who are likely to be interested
number of prospective bidders,
the level of competitive o Source (based on previous interest, operating in the same industry) and evaluate potential bidders (competition risks, transaction approvals by SH, financing,
tension, the complexity of the employee consultation, post-completion operations, transaction structure, level of interest, sanctions/ anti-corruption issues)
Target business and the seller’s
desired timetable for
completion Seller DD on the Target business to identify any potential problems at an early stage (title problems, contract problems, potential claims, contingent liabilities, etc) which
may result in a Vendor Due Diligence Report (which can be circulated to prospective bidders once a non-reliance letter has been signed – buyer can’t rely on it and seller is
not liable for mistakes/ omissions
Confidentiality undertakings obtained from prospective bidders
Distribution of IM & Process Letter
First-rounding indicative bidding and shortlisting of bidders = see below ‘Evaluation of bids’
!/!
o Blackpool & Fylde Aero Club v Blackpool BC – you must consider conforming bids/ bids submitted in the correct form.
o if a prospective bidder decides to not put in an indicative bid, it may have to retune all CI to ensure it doesn’t have it on the Target Co.
o There is no obligation to sell to the highest bidder.
Seller sets up a (virtual or physical) data room to ensure equal access to all bidders
Seller prepares the transaction documents (confidentiality agreement, IM, data room rules and protocols, process letter, SPA, and ancillary transaction documents)
Cash consideration • If the Seller is cash
poor but asset rich,
payment in cash will
provide just what it
needs.
Loan notes consideration • Buyer has more time to raise • Seller will receive • Buyer will be • Risky if buyer gets into
cash – cash-flow advantage. interest payments on obliged to make financial difficulties and
the loan notes. interest payments seller is unable to
• Buyer may be able to set off to the seller. redeem the loan notes.
any claim it has against the Seller should seek to
seller under the W or I in the • Buyer will have to take security or a
sale agreement against the raise cash guarantee to reduce this
amount it owes the seller eventually. risk.
under the loan notes.
• Increases buyer’s • Delayed receipt of cash.
gearing, making
buyer less • Possibly set-off.
attractive to future
lenders/ investors. • If buyer is a newly-
incorporate Co, there
may be some doubts as
to buyer’s ability to
redeem the shares so
guarantee may be
desirable.
Shares for shares • Buyer does not have to raise • Seller may benefit • Procedure involved • Seller doesn’t receive
consideration cash. from dividend in issuing shares cash to reinvest in its
may cause delay retained business until it
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