There are two principal methods of acquiring the business of UK company:
- Buying the shares in the target company
- Buying the target company’s business and assets
A company may seek to develop its business in many ways, including expansion by acquisition. Once a specific target has been identified, the buyer can begin to assess its value. There are various valuation methods that could be adopted, but the four most commonly used are:
- Discounted cash flows
- Market multiples
- Net asset valuations
- Dividend yields
Different methods and multiples may be used according to the target company’s industry sector. Often the price for the shares will be calculated on a “cash free, debt free basis”. Traditionally, completion accounts have been used to establish the value of the shares as at completion retrospectively, with the consideration being adjusted as necessary after the accounts have been agreed
There are two main methods of acquiring a target business that is carried on by a company:
- Share purchase: This involves the buyer acquiring all the shares in the company that owns the target business or assets
- Business or asset purchase: The alternative approach is simply to buy each of the individual assets that make up the target business
The two acquisition structures are fundamentally different. If the shares in a company are purchased, all its assets, liabilities and obligations are acquired (even those the buyer does not know about). If assets are purchased, only the identified assets and liabilities that the buyer agrees to purchase are acquired.
On a share purchase, there may be certain change of control provisions that will need to be addressed, but otherwise there will be no need for such third-party consents. On an asset purchase, where there is a change of ownership of the assets themselves, the consent of customers, suppliers, landlords and others may be required to the assignment or novation of existing contracts.
A seller will often prefer to transfer the company, where the seller’s ongoing liability is generally limited to the extent of warranties and indemnities it gives to the buyer. By contrast, the buyer may have reasons for preferring an asset purchase. It may be concerned about particular liabilities in the target company and may prefer to “cherry pick” assets and only assume known and quantified liabilities.
Due diligence is the information-gathering process carried out by the buyer to find out as much as possible about the target company early on in the negotiations. Through this process, the buyer aims to gain a complete picture of the target and its critical success factors, strengths and weaknesses.
The due diligence exercise generally comprises an assessment of the financial, legal and commercial status of the target. The usual pattern of events is for the buyer’s lawyers to submit a lengthy questionnaire to the seller requesting information on a wide range of matters such as the target’s tax position, its main commercial contracts and the status of the intellectual property used in the business.
The share purchase agreement is the principal contractual document relating to a share purchase. It documents the agreement between the parties to sell and purchase the entire issued share capital of the target company at a specified price and sets out the other terms governing the acquisition. Depending on the complexity and size of the particular acquisition, the agreement can often run to more than 100 pages, as much as half of which may comprise the transaction warranties.
As well as containing lengthy warranties and indemnities, the share purchase agreement deals with how the consideration for the transaction is to be satisfied, any conditions precedent that the purchase may be subject to, any restrictive covenants which bind the parties, completion arrangements and other matters such as the transfer of pension rights.
In addition to the share purchase agreement, there are a number of ancillary documents that typically accompany the share purchase agreement, namely the disclosure letter and the tax covenant.
A proposed share purchase may require various consents or approvals, and this could affect the transaction timetable. The main types of approval that may be necessary include:
- Board approval
- Shareholder approval
- Approval of regulatory authorities or other third parties
The nature and extent of the approvals required will obviously have an important bearing on the timing of the transaction, as will the level of due diligence required.
If the transaction involves a corporate buyer and seller, it will usually be necessary for the board of directors of each party (or a duly appointed committee of the board) to consider and approve both the transaction as a whole, and the execution of the key transaction documents. Any meeting of the directors should be minuted. If the buyer and the seller are UK companies, shareholders’ approval for the transaction may be required under:
- A provision in their articles of association or a relevant shareholders’ agreement
- In certain circumstances, the provisions of the CA 2006
The buyer will need to give early consideration to the question of whether the share purchase will trigger the need for the involvement of any regulatory authorities. The consent of certain third parties, such as the target company’s lenders or one of its major customers or suppliers may be required where, for example, the key contractual arrangements between the target company and that third party are subject to change of control provisions.
On completion of the transaction, the buyer will become the new owner of the target company and will be keen to get on with integrating the target according to its acquisition strategy.
Acknowledgment: This blog relies heavily upon information provided by Martin Mendelssohn and Simon Howley, CMS Cameron McKenna LLP and Practical Law Limited.
NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org.
