The Ins and Outs of Effective Corporate Acquisitions

Listen to our new series - Corporate Acquisitions: Employment Insights

Unravel the complexities of business acquisitions with the insight of Katie Harris, Senior Associate - Solicitor in the Employment Team and Chris Dobson, a Partner and Head of our Corporate Team, to dissect the differences between share purchases and asset purchases. Discover the key factors that can make or break your next business deal, from maintaining existing relationships in a share sale to cherry-picking the best parts of a business in an asset purchase. Find out how these decisions can impact everything from your contracts to complying with TUPE regulations—a must-know for HR professionals. 

Peek behind the curtain of due diligence—a process as essential to acquisitions as the negotiation table.  Learn how to spot liabilities before they become deal-breakers, and how crafty warranties and indemnities can fortify your sale and purchase agreement. For buyers and sellers alike, this conversation is a play book for navigating the strategic chess game of acquisitions. 

Explore the art of full disclosure, the safety net of indemnities, and the precision of crafting a sale and purchase agreement that aligns with your peace of mind. We also delve into the mechanics of earnouts, the protections necessary for sellers post-sale, and the need for restrictive covenants to avoid future competition. On this episode, Chris Dobson's expert guidance, will equip anyone in the corporate sphere with the knowledge to approach mergers and acquisitions with confidence and strategic finesse.

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Chapters

• 0:49 Share purchases and asset purchases
• 6:38 What is TUPE?
• 9:05 Due Diligence process and considerations
• 18:02 Seller's disclosure and indemnity
• 22:03 What other things are included in the SPA?
• 28:13 Top Tips for buyers and sellers

Transcript

 Katie Harris: 0:04 

Hi, I'm Katie Harris. I'm a senior associate in Boy's Turner's employment team. This employment podcast series is going to be looking at different elements of corporate support work that we do as employment lawyers, which is fundamental to any corporate acquisition. The series is going to be aimed at HR professionals or anyone involved in business acquisitions who might have an interest in the legal aspects of buying and selling businesses from an employment perspective. In this opening episode we're going to go back to basics and look at the two different types of business acquisitions, what the differences are and what that might mean for people within that business. I've been speaking to Chris Dobson, who is a partner in our corporate team. I wanted him to give a bit of insight into these transactions from a corporate perspective. I started by asking Chris to tell us about the two different types of business transaction share purchases and asset purchases. 

Chris Dobson: 0:58 

The first one of the company sale or a share sale is where the target company itself is sold, and the other option is a trade and assets sale, where the company will be selling off its business and its assets directly. The circumstances that might apply will vary, generally speaking, in accordance with who the buyer is going to be. So, the classic transaction structure is that it will be a trade buyer, so perhaps a competitor of the target company or the target business coming in wanting to take it over. Other times you might find that it's a management team that are going to be acquiring the target company or business, and that team might be made up of a mixture between existing senior employees within the company. 

Katie Harris: 1:49 

One of the things that I often find when talking to people is that they don't really understand the distinction between a share sale and an asset purchase. And I know you sort of said at the beginning of share sales when the company itself is sold and an asset sale is when the company's assets are sold. But what's the actual real difference between those two? 

Chris Dobson: 2:12 

When we talk about a company being sold, what we mean is that the shares in that company are being sold by the shareholders who own that company will sell their shares to the buyer, and what that means in practice really is that, from a business operational perspective, it's a kind of a clean exit because from the perspective of the company itself, all of its dealings with its customers, with its suppliers, particularly from the perspective of this podcast employees, nothing changes because the relationships are still with the company. All that's happened is that the ultimate ownership of the company itself has changed hands. 

Katie Harris: 2:59 

And so, in what type of circumstances would a buyer of a business want to acquire a company by a share purchase? 

Chris Dobson: 3:17 

If you are acquiring the shares in a company, it's very important to appreciate that as a buyer, you are taking on all the liabilities that come with that as well, because, as we've just said, from a customer-supplier, employee perspective, nothing has changed. So, buyer, you're coming in, you're taking on those liabilities. But crucially, and why it's quite an appealing option for buyers sometimes, is that because of that, the connection, as I say, with third parties isn't changing. It simplifies some of the legal processes. So, for example, you have that key customer that you want to make sure that you secure. If you're just taking over ownership of that company once you've completed, that relationship remains in place. You don't have to do anything from a legal perspective. You've inherited that relationship. The company still sat there as a party to the agreement with the customer. And, again, key to you guys as you're well aware, Katie, I know is that again, the employees, day one after you've completed, are still employed by the company. Nothing has changed from an employee's perspective and from the employer's perspective. 

Katie Harris: 4:30 

So, looking at asset purchases, then, and when we talked about how, with a share, say, or share purchase, the company stays the same, nothing changes. It's literally just the owners. When we're looking at an asset sale, that's very different, isn't it? So, when we're talking about the business and the assets of the company and that gets sold, what does that actually look like in practice? What do we mean by that? 

Chris Dobson: 4:53 

Yeah. So the key thing is that if you're looking at an asset sale, a buyer might be looking to go down this route because they might look at an overall business and they might only fancy some of it. From a buyer's perspective, that's quite appealing because if you go down that route, it might also be that the parts of the business that you don't like the look of so much might also have some liabilities attached to them, and if you don't pick them up, you're not taking on that liability as well. So you're just taking the good stuff, really, that you're interested in. So the big technical point to bear in mind in that process is, as we've touched on earlier, is that if you're acquiring a key customer of the target business, what's going to happen is that the existing contract is going to need to be transferred from the name of the company that's selling it into the buyer's name, and that process is a sign. And it's quite labour intensive really, because if your advisor is looking at these contracts from the buyer's point of view, you've got to look through all of the contract terms and it might not be as straightforward as transferring it across without any issues, because it's very common to find that in certainly big supplier contracts there will be restrictions on the ability for either party to assign their rights under the contract to a new buyer without potentially having to get the express consent of the relevant customer, for example. So that's a big process that we have to look at when looking at business sales is going through all of the terms and conditions that apply to the contracts that they're going to be going across. And, of course, the other big point is going to be TUPE. 

Katie Harris: 6:38 

So just quickly stopping there. For those of you that may not be aware, Chris has used a term there called TUPE. Many of you listening to this may already be aware of what TUPE is. Just in case you don't, TUPE stands for the Transfer of Undertakings Protection of Employment Regulations, and it's basically a piece of legislation that seeks to protect the employment of employees who are in a business that gets bought by another company. But it only applies to asset transfers, and what it does is it just automatically transfers the employment of those employees to the purchaser, protects their terms and conditions and places a number of restrictions around what you can and can't deal with those employees after the transfer. So we will go on in this podcast series to focus a little bit more on TUPE later on, but just wanted to give a quick brief explanation of what that was. In case people weren't aware. What's the typical process and once you've agreed an initial price and you've decided on your method for the final valuation before completion, what's the first step in kind of actually starting the process of buying the business? 

Chris Dobson: 7:48 

So the first step may or may not be the parties entering to heads of terms, which are actually kind of mainly not binding legally, which is an interesting point, but the parties on some transactions quite like to sit down and put down on a couple of sides of paper the key terms that are going to apply to the transaction. You know the heads of terms, sometimes you have them, sometimes you don't, but you all get a process where a buyer will then carry out its due diligence inquiries. But yeah, this is in the form of a buyer sending across to the seller and their advisors a very long list of detailed questions which are aiming to uncover any potential issues that might be sitting in the company or in the business that they're going to want to have a handle on and understand. The key thing to walk back to is the fact that in a business acquisition you're not necessarily buying everything and in our legal documentation we've been very clear that if there's an error in the business that we don't want, then that's very much definitely excluded from the premises of the transaction and the paper. That will be clear that any and all liabilities that sit behind the assets that are not coming across, they're definitely staying put with the sellers. 

Katie Harris: 9:05 

Okay, so we're going through the DD process, and part of that process is the high level of interest, and what sort of areas are we looking at as part of DD? 

Chris Dobson: 9:16 

So we are very interested. Obviously, if it's a shares acquisition, we're very interested in who owns the shares. Do we have certainty that they are the only shares that are in order to take ownership of the company? Do we have any individuals that might have options over shares which mean that down the line, someone has the right to be issued shares in the company? So we want to make sure that we're securing total ownership and control of the company. We're also very interested in contractual matters. As I say, who are the customers, who are the suppliers? Can have sites of all the relevant terms that apply to, effectively, the revenue-driving parts of the business? That's going to be key. So we need to know about the contracts that are in place. We are very interested about intellectual property. If the business is utilising branding or it's using websites, domain names, if it's got particular funky software that's bespoke that it's using, we need to know all about this. We need to know who owns it and whether it's being licensed. Who is it being licensed by? Who's that third party, any potential claims, disputes around all of this area very interesting. Data protection, as you can imagine, again in your area, it's key to make sure that we're not facing a situation where thousands of third parties have been inundated with spam. It's part of the business and we're going to have issues there. Employees, absolutely key, absolutely integral to any DD process, ensuring that we've got a handle on who's an employee, who is a consultant, who's potentially kind of sitting somewhere in between, which makes us concerned about our obligations to them going forward, whether it's pensions or whether it's holiday pay, all of this good stuff. Very interested in that. Property as well, we need to obviously understand whether we are inheriting leasehold interests. Where are we going to be working going forward? Does the company own any freehold property that we need to be aware of? Are there going to be any environmental concerns linked to that? Again depending on the sector. 

Katie Harris: 11:30 

A lot of the DD process and a lot of the focus on it is driven by the buyers what they want, the reasons that they're requiring the business for when you start having those conversations, to identify what their primary purpose is to buy in the business and to what extent does that feed into your approach to DD. 

Chris Dobson: 11:58 

Yeah, I mean the answer is very early on, as you can imagine, Katie. So part of my role is to understand. Yeah, we're asking for a buyer. Obviously, in this context, it's really important for us to understand early on, as you say, that the commercial drivers behind them wanting to carry out this acquisition, what is it that's attracting them to the company or the business they're looking at? Do they have any immediate concerns, areas of importance or risk that might be in there that they want us to look into in more detail? Yeah, and again. Equally, on the flip side, it might be that there's areas where there's going to be less importance, that they don't need us to be spending so much time looking in these certain areas. 

Katie Harris: 12:40 

When we go through the DD process. Obviously the whole purpose of that is to identify are there any hidden liabilities or things within sitting, within that business that we might not like or we don't want or what have you? Let's say, we identify those sort of liabilities. What do we do with that? How do we address them? 

Chris Dobson: 13:01 

This already. It comes back to the main document in the sale and purchase process is going to be the SPA, the sale and agreement, which amongst we can talk about it in a moment, but amongst many other important points in the transaction, one of the key areas that it contains is our list of warranties that the seller of sellers will be required to give. Really, these are kind of rehashing the same questions that we're asking due diligence. A buyer is looking to protect itself by throwing into the mix a long list of warranties which are effectively statements of fact about the target company or business which, if they're then proven to be false or incorrect, it gives you, as a buyer, an ability to bring a contractual claim against the sellers in damages. The classic example would be a warranty to the effect that the company is not being sued by any of its employees for unfair dismissal. Or at the point when we complete If we complete the deal with that warranty and the agreement, nothing is said by the other sellers and then, two weeks down the line, we find out that actually there was a live claim from the company's FD, whatever or whoever, and actually that claim is worth a million pounds and that claim is ultimately successful. As the buyer, you've then got a clear pathway to go back to the sellers who sold you. That company who sold you that liability didn't tell you about it and you're going to go back and you're going to sue them for that million pounds that you've suffered, plus all the associated costs involved in that process. You might choose the walkway from the deal completely. You might choose to go down the line of presenting a price chip to the sellers to be saying that we're still doing the deal. But again, that initial valuation that we looked at a few weeks ago, that was on the basis that there wasn't this stinking claim in the mix. So actually we're going to bring that valuation comes down now to reflect the potential liability that we're facing here. Or what you might do is, as a buyer, that you might say, yeah, well, you might want the price chip anyway, you probably want that. But you're also going to go back to the sellers and say, okay, we want an indemnity to cover this, to cover this point, because, whereas you know, a warranty is there to potentially kind of flush out potential issues and it gets and it gives you comfort if there was something that you weren't told about. An indemnity comes into play where there's an identified issue. You know that there's a problem here as a buyer, in which case the way of looking at an indemnity is, effectively, it's a you know, it's almost kind of a blank check being written by the sellers to say you know, same to you as the buyer, that if we complete this transaction and if ultimately that claim from our, from our former FD, comes home to roost, then yeah, we'll cover you to that as the buyer.

Katie Harris: 16:03 

From a seller's perspective, if you sort of get a big, long list of warranties and you know you're, you look, you're looking at these and you're thinking, oh, I'm not sure I actually I can think of something within the business, that means that you know we can't give that warranty. Or you know what? What? What mechanism is there in place to kind of deal with that? What? What should send us doing that position? 

Chris Dobson: 16:27 

Yeah. So what sellers will do there is they will provide a disclosure on that point to the buyer. So, sitting alongside the, the main SPA document is going to be the sellers disclosure letter. So, effectively, what this is doing is providing opportunity for the sellers to provide the buyer with formal disclosure of any facts or circumstances which in any way contradict the warranties which are set out in the agreement. This really key point for any seller to understand is, as much as they might be having casual, casual conversations with the buyer at some point during the negotiations, or they might have told the buyer about Certain nasty issues during the due diligence process, from a strict legal perspective that's almost irrelevant because unless the formal disclosure is made in this, in this disclosure letter, the buyer has got the potential to try and argue the fact that they weren't actually aware of this particular, this particular nasty matter. And the only way for a seller to make sure the buyer is formally on legal notice is to include this, that you know, the disclosure itself within this, within this letter. So therefore, it, as long as the disclosure itself has been properly drafted and is crafted with enough detail to ensure that buyer quite reasonably turn around and say I wasn't given enough clarity or giving enough detail. If you're able to make sure that you are, you know, crafting it in a way which does tick all of those boxes, then, as I say, removes the ability for the buyer to bring a claim in damages after the event. 

Katie Harris: 18:02 

So as a seller, it's really in the in the seller's interest to disclose as much as possible then that because I can imagine some sellers might be sitting there thinking oh, I know about this horrible thing in my business, I hope they don't find out about it. But actually, the more information that a seller can give, yeah, 

Chris Dobson: 18:22 

Yeah, 100%, yeah, absolutely. And you know, my advice to any seller going into the process is you know, work with your lawyers. Make your lawyers be the ones that give the judgment on whether or not something should be disclosed.

Katie Harris: 18:29 

Because there might be a concern that if they, if they make a disclosure that's gonna result in an indemnity. I mean, is that typically what happens? Or I mean, what's how common, or is it to use indemnity? 

Chris Dobson: 18:50 

Yeah, I mean, how long is a piece of string? I guess really, Katie, it's on very much on a deal-by-deal basis, I would say generally speaking that if a seller is well advised that the outset, to the point where their lawyers are able to provide all of the required information that a buyer might want around a certain issue, that is going to help. In the majority cases it's going to mitigate, if not remove, the need for an indemnity. Because actually if there's proper advice at the outset, it can be looked at and the buyer can have total clarity as to what the potential risk is. And, as I said, in many cases actually it gives the buyer comfort that, yeah, that there is a potential issue there but it's being handled appropriately. And on the basis of the lawyers now having a look at that, we can take you beyond whether or not it really is a material risk or not. The other element as well. There might be cases where it's just unavoidable. There is a big issue. It does require an indemnity, unfortunately, but again, if you're being well advised on the sale side, it's possible to negotiate a series of protections under the sale and purchase agreement or effectively give you a bit of comfort and make it harder for a buyer to come back and make a claim down the line. So you know, with basic headline, limitations might be the fact that you negotiate a threshold of loss that needs to be his before it's actually possible for a buyer to make a claim against the sellers. So that you know, removes the possibility of, you know, a kind of a low value issue coming home after the event and the seller's been bothered by that. So you know a decent, loyal bid to negotiate a, you know a materially high enough number that means that the sellers can kind of sleep at night without being worried about low value, low value claims coming home. The other key one will be a time limitation mechanism. So again, you know, as a seller you want to be avoid being in a situation where you're bothered by a buyer, you know, maybe three or four years after you sold the company, because an issue has just kind of kicked off at that point in time. Again, if you know a decent M&A lawyer for a sellable bid to negotiate a, you know a time period which again reduces the likelihood of claims coming in after the event. And there's many more, you know loads more kinds of limbs, of limitations that we can, that we can put.

Katie Harris: 21:13 

I mean, is it common to kind of cap the level of liability under an identity as well? 

Chris Dobson: 21:18 

It can be. So you know, again, on a case by case basis, this is where you and I work very closely, as you know, because certainly where we're looking at employee related issues, you know where your expertise lies, cases that you can look at that and you can assess the circumstances and you're able to quantify the you know the top end of potential liability that will be associated with that claim. Obviously, the fact is sitting behind that, depending on the employee in question, how long they worked in the business case for all of that good stuff that obviously you know you're an expert on. So in that situation, that's where we as a sell side lawyers in this, in this instance, can then reasonably go back to the buyer and say look, it's not reasonable for you to have an uncapped open ended indemnity on this point. 

Katie Harris: 22:03 

So we talked about warranties and indemnities and the way those are used in the SPA to deal with liabilities and risks that have been identified,basically. Just very briefly, in high level terms, what other things are included in the SPA? What else? 

Chris Dobson: 22:21 

Yep. So the payment mechanism itself. Obviously, if we've got attached on earlier, yeah, that's key For the sellers. Obviously you know, yeah, exactly you know the amount they're gonna be paid and how and when is it going to, is it going to be paid? So, obviously, if you're very fortunate seller, you might find a buyer is prepared to pay you everything on day one. Fantastic, that does happen. It does happen. But probably more commonly, you'll be in a situation where the buyer will agree to pay a certain amount of the overall purchase price on completion and then there will be some deferred elements. So it you know, it might be that you receive 50% on day one and then you receive 25% after a year and the balance and 25% year two, something like that. Although, you know, very commonplace we will have the third payment mechanisms which are dependent on the future performance of the company or the business that's been, that's been acquired. So this is these are called earnout mechanisms. So this is, this is again it's where we work quite closely in, in part because if you're a seller, you've obviously got very vested interest in your, in the, in the company or the business that you've sold Continuing to do well, going forwards. And the buyer, equally, is going to want you to stay in control because you might be a key part of that. And so we're in situations very frequently where sellers you know they sold up, they've lost, they've lost their shares at completion, but they retain interest going forwards because, as long as the business does well and it hits certain thresholds, they're going to receive even more money as a result of the deal. But the, the balancing up, we've got a, we've got a fine. Then is that going forwards? These, these individuals, have gone from the founders, the shareholders, to mere employees, you know, in relative terms. So we need to make sure that they're protected from being unreasonably kicked into, touch and let go before the end of their earn out period and then potentially losing the ability to dictate the performance of the company going forwards. So that's another really interesting area. 

Katie Harris: 24:23 

Yeah, but I mean you know that's going to benefit very, very sizable, isn't it? Because you're? Then those individuals are still in the business and it's going to give this handover you know process and it's going to mean that the business, hopefully, would be more likely to achieve those targets as well.

Chris Dobson: 24:41 

Yeah that's right. That's well, I mean, I find it a really interesting area to negotiate because you're quite right, it's, it's actually. It makes no sense for a buy how, the how, the evil they may be depicted sometimes to want to come in and kick out a seller who is helping to grow revenue going forwards, just as a way of trying to get out of paying them some additional cash under the earn out. You know, because, again, these, these earn out mechanisms are structured on the basis that you know, Although the sellers are going to receive some more bumps as part of this. You know, ultimately, the buyers that I'll be doing even better because you know They've acquired a company which is really flying and generated the cash, so it's a really interesting area and you know, but it does come into it. You know, it does throw into the mix considerations of I'm making sure that these individuals aren't going to be deprived from making decisions which, which would you know, which are going to have a key impact on driving performance going forwards. So that's a really interesting area. So we do that a lot. We'll also contain restricted covenants Big point as well, because obviously from a buyer's point of view, you don't want to pay someone an awful lot of money and then find out that a week down the line They've gone up, they've gone off and have set up a competing business just down the road. 

Katie Harris: 25:52 

Presumably as well. You know there's lots of ancillary documents that go alongside an SPA, so you can mention property earlier. I mean and the need to assign Commercial contracts and things like that. I mean, are there sort of other documents that are needed as well? 

Chris Dobson: 26:08 

Absolutely. So we've got kind of basic form ancillary documents that go alongside the main SPA the disclosure letter, so stock transfer forms, new share certificates, board minutes, deeds that lost share certificates, also of kind of fundamentals like that, alongside other more bespoke agreements that that may be required. So you know, I've mentioned it a moment ago about individuals who will, who will remain employed going forward. So it's very commonly we're going to need to have new service agreements or consultancy agreements drawn up and put in place at completion. Again, it's relatively common that you might find that, certainly in a you know, in these the scenario of a business acquisition, the buyer may need to hang on to some of the existing infrastructure that the seller was providing Pre-completion. But you know, so it might be HR functions, it might be IT teams that continue to need to service that business after the event. So we'll have transitional service agreements covering all of that. Yeah, and the property you've touched on that moment again we might need to have new leases or we might need to vary existing leases. So yeah, you know it's why I love what I do, because it varies from deal to deal. 

Katie Harris: 27:20 

I think one of the there's the set overriding centres from this conversation is that I mean it's fascinating but it's also extremely complex that the process and to make sure that we get this right for the clients, whether we're acting for buyer or seller, I mean and again this is probably going to be a how long is a piece of string question, but I mean how long does a typical, you know, acquisition take from start to finish? I mean, is there, is there an average? I mean I suppose it varies widely.

Chris Dobson: 27:53 

It can do. I mean well, in the interest of giving you a, given your answer here, maybe it's a bit lazy in my experience transactions within the kind of mid market level that we operate in, you know, I think you can expect some of between kind of two to four months typically, obviously with exceptions either way. 

Katie Harris: 28:13 

Very quickly. Top tips for buyers and sellers. 

Chris Dobson: 28:18 

It's all about who you instruct as your advisor, not just as a lawyer, obviously, but who you instruct to look at your numbers as an accountant or a corporate finance expert as well. The reality is, if you're a buyer or a seller, it's a very intense process. You need to make sure that, firstly, you're working alongside advisors who you don't hate, because it's not someone that you're going to dread having to speak to. 

Katie Harris: 28:47 

And you're going to be speaking to them a lot.

Chris Dobson: 28:49 

You're really speaking to them a lot. I appreciate no one wakes up wanting to speak to a lawyer in particular, but you have to accept the fact that you will be doing that and also making sure that you do choose genuine specialists. It's quite easy, if you're going to this for the first time, to just kind of shop on price and then expect them to know what they're doing, and I've seen it before. The reality is sometimes you're going to have people that don't necessarily have the relevant level of experience, which, frankly, has resulted in them not giving a realistic quote of how much time and effort is going to be involved, and it does, unfortunately, then slow the process down and opens up the possibility of risk for both sides, because an inexperienced advisor is not going to be well placed to spot potential issues that should be disclosed. 

Katie Harris: 29:44 

And I think having that relationship with your lawyers as well, so that they really know and understand and get your business and the sector that you operate in as well, is so important, particularly when you're dealing with acquisitions like that. So the advice can be targeted pragmatic, commercial. 

Chris Dobson: 30:05 

It's absolutely key, Katie, because again, increasingly, we're finding that clients these days, their expectation quite rightly is that you work with advisors that know them all. Again, that should just be a basic hygiene point. What then stands out from normal advice to great advice is a lawyer that is then able to apply their legal knowledge and experience in that given commercial situation or the sector space that they're aware of. They know the ins and outs of it and ultimately I look at this a client is not paying you because they want to enjoy the experience of being lectured at and want to be involved with very long, tedious legal arguments. They've got an objective to hit and it might be that that objective is to buy that company or their objective is to sell that company and go off and retire and enjoy their life. And really our role, really all it needs to be, is to work with those clients to ensure that that objective is as hit as seamlessly and as easily as possible. 

Katie Harris: 31:09 

So that was Chris Dobson, partner in our corporate team, with his insights into the world of corporate acquisitions. In the next episode of this series we're going to start looking a little bit more closely at the different types of acquisition that Chris was talking about sale and asset sales. The focus will be on the employment aspects of those and the different considerations from an employment perspective that we have to have in relation to each. Just subscribe or follow the podcast and you will be able to listen to the episode as soon as it is available. Thanks and goodbye.