Home • Accessibility • Independent approach • Turnaround time • Communication skills • Fee structures
solicitors - commercial legal work

Arbitration & mediation
Assets/shares buy/sell
Business start ups
Commercial & transactions
Company law & compliance
Competition law (UK & EU)
Confidentiality & privacy
Construction & building
Contracts drafting
Conveyancing (commercial)
Copyright (infringement & licensing)
Debt recovery & winding up
Designs (registration & infringement)
Directors' duties & liabilities
E-commerce contracts
Employment (contracts, regulations & claims)
Franchising
Intellectual property
Joint ventures
Libel (defamation)
Licensing (premises)
Litigation (commercial)
Music & entertainment
Negligence (general)
Partnerships
Passing-off claims
Patents (infringement)
Planning representation
Professional (regulatory)
Professional negligence
Reinsurance & insurance
Shareholders
Software (licensing)
Sports contracts
Trade marks (trademarks)

Company sales and purchases

Shares or assets
 
There are two methods of acquiring a business. One is to buy shares of the company that owns the assets, the other is to buy the assets which make up the business, in some cases together with certain liabilities of the business.
 
The two are fundamentally different. If shares in a company are purchased, all its assets, liabilities and obligations are acquired (even those that the buyer does not know about). If assets are purchased, only the assets (and liabilities) which the buyer agrees to obtain and which are identified are acquired.
 

An asset purchase is often more complex than a share purchase due to the need to transfer each of the separate assets constituting the business. More consents and approvals are likely to be required than on a share purchase; for example, the consent of customers and suppliers to the assignment or novation of existing contracts. There is, however, a greater amount of flexibility on an asset purchase. If, for example, a target company has liabilities which cannot be easily quantified or identified, or if only part of the business of the target company is to be acquired, then an asset purchase may be the favoured option.

The other key commercial difference between the two transactions is in the nature of what the buyer acquires: on a share purchase it acquires a company owning a business and running it as a going concern (subject to any change of control provisions). In contrast, an asset purchase will not automatically transfer contracts (other than employment contracts in a relevant transfer) or existing trading arrangements to the buyer. Whether this is an advantage or a disadvantage will obviously depend on the attitudes of third party customers and suppliers, the buyer's strategy for the acquisition and how it intends to integrate the new business.

As well as the commercial considerations, there are important tax considerations to be taken into account when structuring an acquisition.


Seller's preparatory steps

Ideally, a seller will be in a position to prepare for a sale and maintain control of the sale process. Whatever the reason, a seller should be sure of its objectives and plan to achieve them.

One of the issues for a seller, assuming a sale is voluntary and has no particular time pressures, will be to decide whether to market the target business actively and openly, perhaps by holding a sale by auction, or whether to approach potential buyers individually. A company may already be aware of interested parties such as competitors, suppliers or distributors or the business' own management. Otherwise, professional advisers can help unearth a wider field of buyers.
 
There are a variety of steps that a corporate seller can take in order to prepare a business for sale, particularly if the seller is part of a group:

  • Effect a pre-sale reorganisation by transferring assets intra-group. For example, the assets to be sold could be transferred into a newly-incorporated subsidiary as part of a hive down. It is no longer necessary, in the light of the capital losses rules, to transfer the asset to be sold into the group company which has capital losses; the losses will generally be available against capital gains of other group companies. Stamp duty, SDLT and other tax reliefs are generally available on transfers between UK group companies, although both reliefs may be lost on a subsequent disposal to a third party buyer.

  • Identify and consider how to deal with assets which are shared by the business to be sold and other businesses within the group. These may include, for example, intellectual property and employees.

Ensure that information which the buyer is likely to require as part of its due diligence exercise is readily available and up-to-date. This will include, for example, information about properties, financial information, key contracts, actual or pending litigation and so on.

Preliminary agreements

  • Before the seller and buyer get as far as negotiating the asset purchase agreement, there are a variety of agreements which they might sign:

    • Confidentiality agreement. Most sales will involve the buyer having access to significant information about the target business, some of which may be confidential. It is therefore standard practice for a seller to ask any prospective buyer to enter into a confidentiality agreement before making any information available.

    • Exclusivity agreement. Embarking on a prospective purchase will usually involve a buyer in a substantial investment of time, effort and money. Buyers will often therefore seek protection against "gazumping" by requiring the seller to agree not to negotiate with other parties for a given period - often referred to as a "lock-out".

    • Heads of terms. Parties to a proposed acquisition will often reach agreement in principle on the key terms of the acquisition before beginning the process of due diligence, disclosure and drafting the asset purchase agreement. It is common practice to record these terms in writing as heads of terms.

      The basic rule is that heads of terms should cover "deal" points rather than drafting points and important deal points rather than routine points. Heads of terms are usually not intended to create any binding legal obligation on the parties, although they may contain individually binding provisions, such as confidentiality and exclusivity clauses, if these are not set out in separate agreements (see above). The clauses which are to be binding should be clearly identified.

      Although heads of terms may not be legally binding, most company executives consider them to be morally binding, at least in the absence of a significant new development. They should therefore be approached with caution and preferably with the involvement of professional advisers.

Due diligence
Once the preliminary agreements are settled, the buyer can commence the process of due diligence - that is, gathering information about the target business.
 
The purpose of the information-gathering process is for the buyer to build as complete a picture as possible of the business it is buying and the issues which will be relevant to the acquisition, such as the nature and condition of, and title to assets, transfer issues and details such as timing and regulatory consents. The business may consist of a number and variety of different assets including tangible assets such as land, machinery, vehicles, fixtures and fittings, raw materials, stock, work-in-progress and office equipment and intangible assets such as the benefit of contracts, goodwill and intellectual property rights.
 
In particular, the buyer should focus on the key asset or assets which it wishes to acquire early in the due diligence process and ensure that title can be effectively passed to it.

Different businesses may be based on one or a combination of key assets such as:

  • Property: for example, a hotel where the key asset is the building itself.

  • Employees: for example, a computer consultancy business or modelling agency.

  • Intellectual property: for example, a computer software company, record company or literary agency where the business is composed of copyright, or a pharmaceutical company whose patents are likely to be crucial.

  • Customers: for example, a manufacturer for a large retail outlet.

  • Licence from an authority: for example, a television or radio company with an area or channel franchise.

The information-gathering process will aim to find out information on a number of "specialist" areas which may impact on the negotiation process and, in particular, on the price the buyer is prepared to pay and the protection the buyer will seek from the seller in the form of warranties and indemnities.

Although the seller will usually give warranties which will give the buyer some comfort if a problem arises after completion, most buyers would prefer to find out about serious problems before the purchase and be able to negotiate an appropriate reduction in purchase price or, in extreme cases, pull out of the acquisition. However, the extent to which a due diligence investigation is possible may depend on the nature of the purchase. In certain circumstances, for example, where the potential buyer is a competitor, the seller may be reluctant to make sensitive commercial information, such as customer lists, available until a later stage in the negotiation process.

For expert advice on the sale or acquisition of a business, please contact one of our commercial lawyers, who will be pleased to get back to you with proposed costings and next steps:

 


E-mail us with details of your enquiry on company-acquisitions@humphreys.co.uk
Include your telephone number,
fax number and address.

Tel (0117) (international +44 117) 929 2662 
Fax (0117) (international +44 117) 929 2722



Relevant Material
     
Humphreys & Co., solicitors Bristol

Also recommended by The Legal 500 Europe, Middle East and Africa 2009 - 2010.

Click here for information about the work we do for private clients.

© Copyright Humphreys & Co. Solicitors
Home Page