Acquisitions and Disposals

This can be a complex area, particularly for the uninitiated. Some of the key issues are as follows:-

Consents and Approvals

Before entering into any commitment to buy or sell a business, it is worth considering what consents and approvals may be required. For example:

• the articles of association of the target company may contain restrictions on the transfer of its shares which have to be over-ridden to allow the sale and purchase transaction to proceed. This will be a formality where the sale is agreed to by all the shareholders.
• the articles of association of the purchaser may impose relevant restrictions, eg upon the issue of consideration shares or in relation to borrowing powers.
• regulatory consent: to the extent that the parties or the target (or any subsidiary of the target) operate within a regulated environment, consent to the transaction may be required from the regulatory authority concerned. For example, if the purchaser is a listed company, the approval of the Stock Exchange may be required to admit any consideration shares to the Official List. Another example is in the case of a target that carries on investment business, where consent to a change of control is generally required.
• "substantial property transactions": where the seller is (or is "connected with") a director of the purchaser, or of a holding company of the purchaser, the transaction will generally require to be approved by the shareholders of the purchaser, unless the consideration falls below certain statutory limits.
• the Listing Rules of the London Stock Exchange require certain transactions (Reverse takeovers, Class 1, and related party transactions) by a company to be approved by the shareholders in general meeting.
• contracts such as loan agreements and joint venture agreements often contain provisions restricting the purchase and sale of assets, including subsidiary companies. The terms of any relevant documents should therefore be reviewed. Beware also of any change of control provisions affecting a target company, ie in a third party agreement.
• powers: the powers of the contracting parties should be checked, in the case of a corporate body, trustee, receiver, etc.

Buyer Beware

The law affords almost no automatic protection to the purchaser of a business. It is of critical importance, therefore, for the purchaser to conduct its own assessment of the company or assets in question and to obtain comprehensive warranties and representations from the seller. This is referred to as due diligence. Because of the inherent difficulties associated with the pursuit of warranty claims, the more information that can be verified in advance the better.

The areas to be covered by a due diligence investigation will include:-

• legal
• financial
• environmental
• taxation

Particularly in the case of large scale acquisitions, the due diligence process requires careful management. The scope of the exercise should be agreed between the purchaser and the lawyers and other professional advisers involved. This should cover the matters to be investigated, the degree of detail, the commercial rationale of the transaction and the lines of communication to be maintained.

Wherever possible, the due diligence investigation should include discussion with the management of the target company and their auditors and professional advisers. Where more than one jurisdiction is involved, the lead advisers should co-ordinate the efforts of the local advisers and ensure that the reports are prepared on a uniform basis. In all cases, it is essential that one person takes responsibility for understanding the whole due diligence exercise.

"Financial Assistance"

The Companies Act 1985 prohibits a company (or any subsidiary) from giving financial assistance directly or indirectly for the purpose of the acquisition of that company or for the purpose of reducing or discharging any liability incurred for the purpose of that acquistion.

This provision applies only to the acquisition of a company and has no relevance to the purchase of business assets. There are criminal sanctions for its breach.

Financial assistance is defined as:-

• financial assistance given by way of gift
• financial assistance given by way of guarantee, security or certain types of indemnity, or by way of release or waiver
• financial assistance given by way of loan or any other agreement where any obligation of the entity giving the assistance (e.g., a lender) is to be fulfilled before the obligations of any other party to the agreement (e.g., the borrower).
• any other financial assistance given by a company the net assets of which are thereby reduced to a material extent or which has no assets
  To be relevant, the transaction must constitute "financial assistance". This has no technical meaning, but falls to be determined by the "language of ordinary commerce". We must examine the commercial realities of the transaction and decide whether the company can properly be described as the giving of financial assistance by the company. For example, the courts have drawn a distinction between undertakings given for the purpose of giving financial assistance and undertakings given to re-assure the shareholder or to induce it to enter into the transaction. The latter did not constitute "financial assistance."

Case Study:

After several years of trading satisfactorily a company ran into financial difficulties and had to be sold. S, the owner/director agreed to sell the firm for a nominal consideration but in a deal where the purchaser agreed to pay S a consultancy fee of £5,000 p.a. over several years. It was further stated that S would not be required to do any work for his fee. When, subsequently, S sued the company for his unpaid consultancy fee the Court ruled that this had been "unlawful financial assistance".

Even if the transaction has no cost to the target company, nevertheless there may be financial assistance. For example, where a target company buys assets at market value from a purchaser to allow it to fund its purchase, this would constitute financial assistance, possibly even if the transaction were in the genuine commercial interests of the target company. This prohibition may still apply where no acquistion of shares takes place. It is suggested that every transaction entered into in the context of a share acquisition should be examined in the light of these provisions.

Conclusion

The sale or purchase of even small businesses is complex. The current legislative framework, while affording some protection against fraudulent or dishonest conduct by the devious, also contains traps for the unwary. Thus parties acting in good faith can, without good advice, find themselves doing deals that may variously be unlawful, unenforceable and/or simply commercially unwise. Where other regulators are also involved, especially the Stock Exchange, the number of matters to be considered increases significantly. Bigger sales and purchases tend, in any case, to become more complex simply because of the amount of detail that is involved and a very methodical approach becomes more and more important. Getting the right legal advice is therefore essential.

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Tom Rennie	01224 428000
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