Summary
Summary Due Diligence Considerations - Private Acquisitions
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Condenses all the reading, lectures and SGS activities to about 30% the original volume. Clear, Concise and Organised.
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2. DUE DILIGENCE (DD)‘Caveat Emptor’ – buyer beware. Essential for B to carry out full investigation into T to check it is
a sound investment.
PURPOSE
1. Ascertain whether proposed acquisition represents good commercial investment
2. Identify potential risks – May affect structure of transaction (asset if significant liabilities)
3. Provide B with knowledge that will assist in negotiations (e.g. price reductions)
4. Help B identify where it may require warranties and indemnities (make up around 75% of
doc and are heavily influenced by DD)
5. Establish whether consents/approvals from regulatory authorities (e.g. CMA) are required
before proceeding
6. Assist B’S understanding of T’s business – helpful if wanting to integrate T’s business into
B’s existing operations
GUIDING PRINCIPLES
1. More thorough DD required for share sale (taking whole business, warts and all)
- business sale limited to assets + liabilities being acquired
2. Focus on verifying assumptions underpinning price B offers for T (e.g. check earnings have
not distorted by intra-group trading on preferential terms)
LEGAL DD
Private treaty transaction – buyer’s solicitors (BS) send DD questionnaire to seller’s
solicitors (SS) who will respond OR set up data room
Auction sale – S sets up data room of info about T which selected bidders are permitted to
review
o May conduct vendor DD report, sent to bidders to speed up process
Once requested info passed to BS they produce DD report for B
o Full form report – comprehensive report w/ executive summary
o Exceptions only report – focuses on material + problematic issues
Important to discuss scope of DD process with client b/c time consuming + expensive
COMMERCIAL DD
Environmental report
Report on T’s occupational pension scheme
Report on Insurance risks / stat. insurance requirements
IP + IT report (patents and trademarks owned)
Market research report (projected market conditions)
Beware of data room – S likely to be selective with the documents available
, FINANCIAL DD
Accountant’s appointed to produce report inc. analysis of:
- T past trading history; - T’s current trading position;
- trends regarding profitability + margins; - forecast trading results;
- suppliers + customers; - T’s main competitors;
- T’s accounting systems + financial controls; - T’s tax affairs;
- T’s mgmt structure inc. its directors, their qualifications and their service contracts.
Tax consequences of company leaving group
The fact that a co. is changing hands may have tax implications for S if T is group member
that will be leaving it as a result of the sale
When a co, which has received a chargeable asset as a result of an intra group transfer,
leaves a group within 6 years of the receipt of that asset, a charge may arise under
s.179 Taxation of Chargeable Gains Act 1992
o Known as ‘exit’ or ‘de-grouping’ charge
SDLT claw back
Arises when T, which has received land as a result of an intra-group transfer, leaves the
group within 3 years of the date of receipt of the land – triggered by share sale
Liability for SDLT will fall on T, and therefore this is a buyer issue, as the requirement to
pay SDLT will decrease the value of T, and thus indirectly affects the buyer
Upon an intra-group transfer of land (within the same Stamp Tax Act group), no SDLT is
payable
o Stamp Tax Act Group – one company 75% subsidiary of another or both companies
75% subsidiaries of a third company:
a) Beneficial owner (directly or indirectly) of ≥ 75% OSC;
b) Beneficially entitled to ≥ 75% distributable profits; and
c) Beneficially entitled to ≥ 75% assets on winding-up
However, SDLT liability will arise upon completion of the sale of T, calculated at the market
value of the property at the time of the last intra-group transfer
Buyer may either ask for a reduction in the purchase price or indemnity in respect of any
SDLT claw back
Seller may wish to consider possibility of delaying the sale, if the 3-year threshold is near
Remove property (restructuring as an asset sale)
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