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There are some transactions in business that are significant and require substantial forward-planning to be a success. Every step must be sketched out meticulously in order to make the process go smoothly; trying to rush ahead will inevitably lead to errors and oversights.
Whether it is a restructuring, demerger or a company purchase, knowing how and what to plan for will be an integral part of successfully completing the deal. However, to do this effectively you need experience and knowledge.
You should always seek professional advice throughout any transaction but below we have outlined some of the primary considerations.
Consider Merger Approval
Before you start the process, if the transaction could be of interest to the UK Competition And Markets Authority under the Department for Business, Energy and Industrial Strategy (BEIS) you may have investigated the remit of the merger control. In the UK, merger control is considered to be voluntary. This is often when a problem can arise because voluntary does not mean there are not conditions to fulfil and it does not mean you can opt out of meeting what is expected.
One particular area of interest should be the fact that even completed transactions can be subject to review by the UK Competition Authority (CMA). They hold discretion which means they can decide when or if they need to investigate so you may be subject to vigorous checks - or none at all.
If the CMA chooses to check your transaction, they hold considerable power. They can prevent a transaction from proceeding, even if it is already at an advanced stage or they can order a completed transaction to be unwound.
It is possible to submit plans to the CMA prior to a transaction to ensure there is no breach. However, be aware that their approach is very detailed and analytical and may highlight concerns which you had not previously considered.
In order to have the best chance of being able to demonstrate to the CMA that the transaction should proceed, you will need to provide internal documentation and have strong rationale for every decision taken. This may include being prepared to provide CMA with commercial data.
Using the potential expansion of a competitor as justification is unlikely to be a successful defence.
Each case will be considered on its own individual merits but the CMA should never be dismissed as a factor for relevant transactions, and should form part of the planning from a very early stage.
Setting aside the potential issue with the CMA, before you take any steps in a transaction a confidentiality agreement should be created. This will protect both the buyer and the seller and ensures that information is kept confidential, and that there is an exclusivity to negotiate during the discussions.
This type of agreement is essential because without it there is no legal obligation to keep any information confidential. A seller could discuss the buyer’s plans for the business with other interested parties, passing on trade secrets or price-sensitive information that could give away an advantage.
Without an agreement there is no way to keep conversations out of the public domain, and there may be ulterior motives for entering discussions. A confidentiality agreement ensures that only parties who are genuinely committed are party to the most sensitive information.
Drafting Heads of Terms
If you get the heads of terms right the cost of the transaction can be reduced while still achieving the desired outcome. Heads of terms are generally prepared right at the start of the process as they set expectations for everything which is set to follow.
Some of the most common areas which are considered fundamental to the heads of terms include:
- The parties in the transaction
- The agreed price
- The time-frame
- Financial requirements
- Shares (where relevant)
Each of these areas should be described in full so that both parties understand and agree before moving forward with due diligence. As the confidentiality agreement will already be in place by the time you draft heads of terms there should be no reticence about discussing figures and data.
The Importance of Disclosure Letter
In transactions, no matter how amicable the process is, buyers and sellers often find themselves at odds with each other. With different aims, it is not always easy to assess whether your requirements are reasonable, or whether you need to compromise.
Buyers will ask for warranties from selling shareholders; this is a promise that certain key features will be delivered. Conversely, shareholders will typically be keen to limit the warranties provided. This is one of the key areas of conflict that can arise.
Some of the warranty areas which are frequently discussed include limits on the value of any claims, allowable time-frame for claims and how disclosures made may limit the warranties. In other words, if the investor already knows and accepts the risks, they cannot make a claim at a later date.
This latter point is why the disclosure letter is so vital for both parties, but for the seller in particular. By ensuring they have comprehensively briefed the buyer about past problems and any pending difficulties, they can protect themselves against future claims under the warranties. If substantial information arises within the disclosure letter, the buyer may legitimately ask for an amendment in the price.
Managing Due Diligence
The type of transaction and the nature of the business will determine the due diligence which is required. However, this is an essential part of any transaction and should never be rushed. If a seller seems keen to skip past due diligence or only provides sketchy information, you should slow the process down and dig further.
Due to the wide-ranging nature of the due diligence which may be required, there is no single set formula. A virtual data room can be an efficient way of managing the exchange of information and can speed the process up.
Ensure that all information you ask for is comprehensive and relevant. The details you receive may prompt further requests for information and these should be exhausted to your satisfaction.
The due diligence process may cover the financial aspects, IP rights, employment contracts and any pending claims, plus any other information relevant to the industry.