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#4787 - Early Stages Share Sale - Mergers and Acquisitions (Private Acquisitions)

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Share sale

Asset sale
only asset changing hands are shares in co all individuals assets transferred - B can cherry pick which
B acquires T w/all its assets and liabilities B can carry on business in succession to S
to outside world nothing has changed As part of acq, B automatically assumes some liabilities (eg TUPE) however can cherrypick and most liabilities remain w/S
Cons is exchanged for shares in T Cons is exchanged for assets of T

Early Stages

Stages of a transaction in overview

Concerns:

Buyer

Seller

knowing T is:

  1. a worthwhile acq

  2. that it is worth consideration being paid

knowing S is:

  1. seriously committed to selling T @ price B wants to pay

  2. not currently engaged in negotiations w/1 or more potential Bs

as process is v spenny

  1. obtains best possible price for T; but

  2. that commercial integrity of T is not compromised as a result of aborted sale

2 x types of sale considered on PA:

  1. Private Treaty Sale ‘PTS’ - where S negotiates w/one B

  2. Auction Sale ‘AS’ - where S negotiates w/several competing Bs

How does the S go about meeting B’s concerns on a sale?

Private Treaty Sale

Auction Sale

Both

  • heads of agreement

  • exclusivity/lock-out agreement = agreement that for a certain period of time S won’t speak to any other Bs

  • process letters

  • indicative bids (equivalent of heads of ag)

 - confidentiality agreements

Preliminary stages: meeting concerns, break fees [if applicable], DD [legal, financial and commercial]

Auction sales:

Ads for S

  • S usually reach more Bs thr/AS

  • competitive tendering can increase prices

  • process enables S to obtain better sale terms than on PTS

  • S can use data room to control amount of docs disclosed and limited investigation permitted ot Ss

  • S has opportunity to control timetable, esp to reduce time it takes to proceed from agreement in principle to completion

  • a well market auction can enable d’ors to demonstrate to s’ers and c’ors that they have obtained best price for T

Disads for S

  • not all business are suitable for sale by auction

  • an auction may also be inapprope where the structure of buiness is particularly complicated or where there are significant external factors

  • the cost to S is usually higher than on a PTS

  • the knowledge that a T is for sale can interrupt the normal course of business

  • Management (‘M’) may need to spend more time on sale than business - potentially damaging

  • process of negotiating w/more than 1 bidder imposes additional stresses on S and M of T

  • some bidders may not be serious and are only interested in finding out info re a competitor

  • if auction does not result in a sale, the failure is public and T is soiled goods

Disads for B

  • it may well be forced to pay a higher purchase price

  • its chances of success are lower than w/a PTS

  • the level of contractual protection is lower than w/a PTS

  • S can choose what info to release

  • may not reach auction floor (aka minimum price acceptable)

  • likely to receive less info re T

  • greater risk fo damage being caused to T’s business before sale

  • B has less defences than in a PTS against costs

Ads for B

  • some DD done for you

  • can obtain views from other bidders of true MV

  • you know if you’re preferred bidder

Preliminary docs

Confidentiality Agreement

  • all potential bidders in auc required to sign

  • ag’s will be drafted ito state that they are for benefit of future owners of T as well as current owner (aka S)

Process letters

  • set out procedures and timings for AS

  • will also contain information memorandum [see below]

Information Memorandum

 - contains info about T to give bidders a basis on which to make an indicative bid for T nb. no similar letter or doc on PTS

Evaluating bids

Comparing indicative bids on an AS

Nb. if you see a plc assume it’s listed unless the q tells you otherwise

Categories to consider

Points to consider

Who are likely Bs?

  • affected by competition

  • market share?

  • approvals required: s’er, investment approval, consultation w/ e’ees or e’ee representatives, operations (B’s concerns re ability of T to operate after sale), structure (individual Bs prepare a different sale structure to one proposed by S)

what is B offering to buy?

 Asset/share sale?

Amount

 consider effect of form of cons too

Form of cons?

 See also table below - generally cash preferable

how will purchase be funded?

  • consider types of cons

  • Does the co already have financing in place ie. have enough DP

  • Or is debt finance already in place? Nb. if listed a co can basically issue shares in itself to generate cash - however time/cost implications of this.

  • Will class tests because it’s a listed co delay completion?

Any other issues?

  • Does the co have conditions on NAV @ completion? How quickly can deal be put thr/? [6 wks is pretty quick]

  • If paying in LNs, when are these redeemable/how soon can S get money? [Usually 18 months to show HMRC LNs are bona fide and commercial]

  • Deal subject to any DD?

  • is any part of deal @ B’s discretion?

Basic differences between AS and PTS

Outline of PTS sale:

Seller

Buyer
take instructions take instructions

Agree

Heads of Agreement

Confidentiality Agreement

Lock-out agreement
DD Questionnaire (‘DDQ’) to S’s solicitor
Respond to DDQ Analyse response to DDQ. Advise client
Draft Acq Agreement (‘AA’)
Review draft AA. Advise client.
Mark up draft AA to include Vendor Protections Review marked up AA. Advise client.
Prepare draft Disc Letter (‘DL’) Review DL. Advise client.
Negotiate and agree AA and DL
Exchange contracts
Obtain consents/fulfill any conds
COMPLETE

Outline of AS

S

B

instruct solicitors

identify prospective Bs

consider preliminary issues

 instruct solicitors
S conducts extensive preparation, invariably using a fin advisor or investment bank
Confidentiality Agreement prepared by S and signed by B
Prepares info memorandum and process letter for prospective Bs and prepares online Data Room
Bs review info memo and prepare indicative bids
1st round of indicative bidding

Prepare Data Room

Review indicative bids (including forms of consideration and tax issues)

 Selected bidders visit Data Room
Draft Acq Aq Review and mark-up draft AA

Review marked up AA

select bids to go forward

Site visits

2nd round of bidding from limited number of Bs, usually accompanied by responses to sale docs

Negotiations w/1 or more B leading to ...

Select preferred B
Prepare Draft Disc Letter Review draft DL
Negotiate and agree AA and DL
Exchange contracts
if AA is conditional, obtain necessary consents/fulfill necessary conditions
COMPLETE

Unlike PTS, AS normally involves a 3rd party, usually a fin advisor, as the contact point for potential Bs and substantially more work required by S before process gets fully under way (costly, lengthy)

Preliminary Considerations

FSMA

s.19(1) prohibition

s.19(1) “no person may carry on a regulated activity in UK .. unless he is:

  1. an authorised person; or

  2. an exempt person

Exemptions -

Art 70 FSMA 2000 (Regulated Activities) Order 2001 (‘RAO’) a person will not be carrying on a regulated activity by entering into a trans if the trans is to acquire or dispose of sahres ina co (open than an open-ended investment co) and:

  1. the shares being bought/sold consist of or include 50% or more of the voting shares in body corporate; OR

  2. the shares, together w/any already held by B consist of or include @ least 50% of voting shares; AND

  3. in either case, the acq or disposal is between parties each of whom is a body corporate, a partnership, a single individual or a group of connected individuals (‘connected indivs’ = a single group of persons each of whom is or will be either (i) a d’or or manager of co being sold, (ii) a close relative of any such d’or or manager, or (iii) a person acting as trustee for any of the person in (i) or (ii).

s.21 - Financial Promotions
A person must not, in the course of business, communicate an invitation or inducement to engage in investment activity, unless he is an authorised person or the contents of the communication has been approved by an authorised person

Relevant exemptions in FSMA 2000 (Financial Promotion) Order 2005 (‘FPO’) and include:

  • Art 19(1) made only to recipients whom person making the communication believes on r’able grounds to be investment professionals

  • Art 49(2)(a) made to any body corporate which has or is a member of the same as an undertking which has, a called up share capital or NAV of not less than:

  • (if the body corp has more than 20 members or is a sub undertaking of an undertaking which has more than 20 members) 500,000;

  • otherwise, 5 mill; and

  • Art 62(2)(b)(ii) related to a trans which may r’ably be regarded as being the acq of day to day control of the affairs of the body corp (has to be 100%)

Listed Co’s

Listed co on PA module - a co which has shares listed on Official List and traded on MM of LSE

General obligation of disc

  • generally to disc major new developments in its sphere of activity if info is not already public knowledge and may have significant effect on co’s share price

  • DTR allow disc to be delayed so as not to prejudice legitimate interest provided that:

  • the delay would not mislead public; AND

  • anyone who receives info owes a duty of confidentiality to listed co; AND

  • listed co can ensure confidentiality of ino

Negotiations in course normally constitute legitimate interest

Class trans’

LRs classify a trans according to its size according to ratios in Chap 10 (Ann 1)...
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