PRIVATE ACQUISITION CONSOLIDATED NOTE

OVERVIEW

CONSIDERATION
 Methods of payment
o (1) Cash
o (2) Paper: Shares (share for share exchange) or Loan notes
o (3) Earn-outs
 Only part of consideration paid on the date of completion + Buyer agrees to pay additional amount of consideration
at a particular time in the future
 The additional amount is calculated based on the level of profits of Target
 Pros to Seller: Possibility to get more money than normal payment
 Cons to Seller: (i) Uncertainty – not able to reinvest all money (ii) Set-off clause against warranty/indemnity claim (iii)
For individual – subject to tax since Day 1 (although adjustment is permitted)
o (4) Retention accounts (escrow account)
 Part of consideration is set aside and in a joint account between Buyer and Seller + Available to Buyer in the event of
a successful warranty/indemnity claim
 Timing of consideration
o (1) Paid at completion
o (2) Deferred consideration ie earn-outs, completion account
 Basis of calculating consideration
o (1) Debt free/Cash free
 Consideration set on the assumption that there is no cash or debt in Target
o (2) Net asset value
 Purchase price based on NAV of the audited account of Target
 NAV may be adjusted on the date of completion based on ‘Completion Account’
o (3) Completion account
 ‘Completion Accounts’ to be used a purchase price adjustment mechanism when the purchase price is based on the
estimate NAV of Target, – they cannot be drawn up until after completion, when all relevant information and financial
records will be available.
 The clause includes details relating to who prepares them, what mechanism to follow, what happens in the event of
dispute, how and when the adjustment will work and maximum payment
o (4) Locked-box mechanism
 Purchase price is fixed based on the account that is previous drawn up (ie locked box account)
 Buyer’s concern: Changes affecting Target since the account being drawn – Buyer to be protected from un-updated
account by indemnity for any monies that have been taken out of Target outside the ordinary course of business after
the date of the locked box account

SHARE SALE

STRUCTURE OF SHARE SALE

Private Treaty Sale Auction Sale

Buyer usually has more/equal bargaining power with Seller Seller usually has more bargaining power than Buyer
Buyer draft SPA (heavy warranty/indemnities) Seller draft SPA (light warranties/indemnities)
Documentations: Documentations:
(1) Confidentiality Agreement (1) Confidentiality Agreement
(2) HoT (2) Information Memorandum (‘selling documents’ designed to
(3) DDQ get bidders interested)
(4) Exclusivity/lock-out agreements (3) Process Letter
(4) Dataroom (no DDQ)
(5) Indicative bids
Advantage for Seller Advantage for Seller
 Avoid information leak  Maximise selling price; easy to defend with S/H
 Potentially cheaper  In control of disclosure and timetable
 Better sale terms
Disadvantage for Seller Disadvantage for Seller
 Buyer in control of DD and drafting process  May not appropriate for business with limited market
 Seller the same loses bargaining power that it has  Reputational damage if the deal not completed
 Potential leak of confidential information
 More expensive
Advantage for Buyer Advantage for Buyer
 More bargaining power  Lower price if no competitive bidder
 Better sale terms
 Private Treaty Sale
 More chance of success
 Ability to access information/management
Disadvantage for Buyer
 Not much disadvantages other than general risks
wasted costs; Buyer usually prefers private treaty sale
Auction Sale
 May get confidential information without having to buy
Target
 Cheaper in terms of expenses towards process
Disadvantage for Buyer
 Risks wasted costs as lower chance of success
 Less access to DD, management
 Less bargaining power; worse sale terms
 If success, Target may be damaged because of
information leak

AUCTION SALE
PRELIMINARY CONSIDERATION
ISSUES
1. Prohibition under s19(1)
FSMA
2. Restriction on financial
promotion under s21 FSMA
3. Requirement to provide
prospectus under s85 FSMA
4. Liability for misleading
information in the IM
5. Data protection under DPA
6. Competition law issues
CONCERNS
- Prohibition from carrying on a ‘regulated activity’
under s19(1) FSMA, unless authorised/exempt
- Auction sale could be ‘dealing in investments as
principal’ (A14RAO) by Seller or ‘arranging deals in
investments (A25RAO) by a solicitor
- Prohibition from ‘communicating an invitation or
inducement to Buyer to engage in investment activity’
which includes a share sale, unless being an
authorised person or approved by authorised person
or any of the exemptions apply
- IM constitutes an invitation/inducement to engage in
investment activity (ie acquisition of shares) under s21
FSMA
Seller required to prepare a prospectus as the share
sale may be considered as the offer of transferable
securities to the public
- Criminal liability to knowingly/recklessly making
misleading, false statement or dishonestly conceal (s89
FS Act 2012)
- Civil liability for misleading information as fraudulent
misrepresentation (Smith New Court v Scrimgeour
Vickers – overstating level of interests in Target)
- Personal data (ie. info relating to an identifiable living
individual) must be processed fairly and lawfully
- The data subject must be informed that the data will
be processed and the purpose of such process
EU Merger Regulation (EU Dimension)
- The Commission approval is required prior to the
completion of transaction
- Effect: Delay/prevent the deal from completion
EXEMPTIONS/SOLUTIONS
Exemptions (A70 RAO), if:
(1) Transaction to acquire/dispose shares
(2) Those shares, or together with any
already held by Buyer, consist of 50% or
more of the voting shares.
(3) Transaction between a body
corporate.
Including a paragraph in the IM confirming
that IM is only sent to people within
exemption, ie. a body corporate to
acquisition of day to day control (ie 50% or
more) (A62(2)(b)(ii)FPO 2005)
- Not required if offer to less than 150
persons (s86(1)(b)FSMA)
- Including a statement in IM to address
this point ‘intended solely for limited
number of persons’
Make sure that the IM does not embellish
the information of Target
Precautions
During the DD process: personal data
should be provided on an anonymous
basis
At completion: no processing of personal
data as the data controller (ie Target)
remain unchanged (as opposed to asset
sale)
Fair processing conditions
(i) Obtaining consent from employees and
customers – not practical
(ii) Disclosures that are in legitimate
interests of the data controller, provided
that such processing does not prejudice
the rights/freedoms or legitimate interest
of employees/customers
Employees information
A good practice to follow the Employment
Practices Code
EU Merger Regulation:
(i) Early informal notification to the
Commission
(ii) After the exchange – formal
notification for approval
(iii) Phase I Investigation – 25WDs to
conclude whether to give unconditional
approval, conditional approval or refer to
Phase II
(iv) Phase II Investigation 90 WDs to
conclude whether to give unconditional
approval, conditional approval or reject
 ISSUES
7. S/H approval
8. Regulatory consents
9. Contractual consents
10. Specific issues if one of
the party or its sub is a plc
DUE DILIGENCE (COMMON ISSUES FROM SGS2):To ascertain whether it’s a good investment, identify risks and provide info for
negotiation and contractual protections (caveat emptor), establish whether third party/regulatory consent or approval required.
ISSUES
1. Employment related issues
1.1 Directors leaving Target
CONCERNS
UK Merger Control
- No general requirement to notify
- CMA will investigate if the merger is a ‘relevant
merger’:
(i) Turnover Test: Target’s turnover in the UK
exceeds 70mil
(ii) Market Share Test: Merged entity will
have a market share of 25% or more
- CMA charges fees on sliding scale
- AoA of Target may require S/H consent
- Approval required for directors entering into new
long-term service contract
Target in specific business may require the authority
approval eg. FSA regulated firm needs FSA approval if
10% or more shares are changing hands before selling
shares
Contracts that Target is a party to may require consent
of another party (eg. change of control provision)
(1) General obligation to disclose inside information
under MAR if the information is not public knowledge
and it may have significant effect on the company’s
shares
Effect: Not confidential; attracting rival; affecting price
(2) Class transaction: requirements depend on the
size of transaction:
- Gross assets tests (gross assets of T/gross
assets of listed co)
- Profits test (profits of T/profits of listed co)
- Consideration test (% of consideration to
market val. of listed co)
- Gross capital test (gross cap of T/gross cap
of listed co)
Class 1 – if ratio is > 25% - 100%
Class 2 – if ratio is ≤25%
Effect: Possible delay
(3) RPT – a transaction between the listed company
and its related party (eg directors), eg. MBO
Effect: Possible delay
CONCERNS
 Key person leaving business - affecting value
 Sufficient and enforceable RCs - (i) Scope and
duration (ii) Protect legitimate interest: non-
compete, no employees/customers/suppliers
solicitation, CA
EXEMPTIONS/SOLUTIONS
UK Merger Control
- Obtaining informal advice from CMA
- Doing statutory voluntary pre-
notification (by Buyer)
- CMA Investigation
(1) Phase 1 – 40WDs to conclude whether
to give unconditional clearance,
conditional clearance or refer to Phase 2
(2) Phase 2 – 24 (+8) WKs to conclude
whether to give unconditional clearance,
conditional clearance or prohibition
- Appeal to Competition Appeal Tribunal
Always check AoA at the start of
transaction
Project management - always check the
relevant regulations as it might delay or
prevent completion
DD– Checks the relevant contracts
(1.1) Disclosure can be delayed if: (i) the
immediate disclosure is likely to prejudice
the ‘legitimate interests’ of the listed
company (DTR list include ongoing
negotiation) (ii) the delay not likely to
mislead the public + (iii) the listed is able
to ensure confidentiality
(1.2) Notify FCA + explanation
No exceptions – need to comply:
(2.1) Class 1 = delay + split exchange and
completion (S/H approval to be CP):
- Notify RIS + details of transaction ASAP
- FCA approved explanatory circular to
S/H
- S/H OR is required
(2.2) Class 2 = only notify RIS ASAP
RPT transaction requires:
- Notify to RIS
- FCA approved explanatory circular to S/H
- S/H OR
- related party cannot vote the transaction
Exception for a small transaction (ratio not
more than 0.25%)
SOLUTIONS
 Key person leaving – (i) reduction in
price or (ii) walkaway
 RCs not sufficient/unenforceable - (i)
new agreement with directors (ii)
settlement agreement – likely need
to pay more
ISSUES
1.2 Employment contract
1.3 Pension scheme
1.4 Terminated employees
2. Group related issue
2.1 Shared supplies/services with
the Group
2.2 Deemed distribution
2.3 De-grouping charge
2.4 SDLT clawback
CONCERNS
 Data protection issue - not practical to inform
all employees
 Employment terms:
(i) Notice period – if not in compliance with
Employment Right Act, the statutory
entitlements would apply
(ii) Enforceable RCs
 Target’s liability for its portion of deficit a
group final salary scheme which exists at the
time it stops participating (s75 Pensions Act
1995)
 Termination in breach of contract – (i)
wrongful/unfair dismissal claim (ii) RCs
unenforceable (General Billposting v
Atkinson)
 Losing necessary service after leaving the
Group - (i) costs of set-up (ii) inability to
continue operation additional costs
 Losing benefits of intra-group rate of service
– Affecting Target’s profitability
 Liability as a result of unlawful (deemed)
distribution – Target holding properties on
constructive trust for Transferor
 Transfer of properties undervalue from (i)
parent to sub (s829 CA06) or (ii) sister co to
another sister co was ‘deemed distribution’
(Aveling Barford v Perion)
 If no sufficient distributable profit at the time
of transfer it would be unlawful distribution
 Consequence of unlawful distribution (s847
CA06) – statute does not extend to unlawful
deemed distribution, in practice it accepts to
be the same
 Additional tax as a result of de-grouping
charge - Seller’s concern as the charge will be
notionally added to the sale price
 De-grouping charge incurs when Target
received intra-group capital assets transfer +
leaving group within 6y of such receipt –
 SDLT payable on the market price of
properties on the date of intra group transfer
– incurs when Target received intra-group
properties + leaving group within 3y of
receipt
 Buyer’s concern as the liability incurs in
Target
SOLUTIONS
 Data protection issue – disclose on
anonymised form
 Employment terms: - Buyer to
consider if variation to terms esp.
RCs needed
(i) Reviewing actuaries’ report to
determine the risk
(ii) if significant risk, either restructure as
asset purchase [Note: The effect of
employees transferred under TUPE] or
walkway
(iii) To the extent that risk is acceptable,
- Buyer to ask for reduction in sale
price or request an indemnity
(with retention account)
- Ensure that warranty given to
full details have been provided,
no other scheme it has
participated, all contribution
been paid up-to date, the
scheme been administered in
accordance with laws
 Wrongful/unfair dismissal claim:
Warranty or indemnity against
potential claim
 Unenforceable RCs: Settlement
agreement
 Losing necessary service – Buyer to
request for a transitional services
agreement, unless services are
relatively normal eg HR
 Losing benefits of intra-group rate –
(i) try negotiating favourable terms
or ii) reduction in price if affecting
profitability
 First - check if the transfer is made
under value?
 Second - Buyer to review the
accounts at the time of intra-group
transfer to make sure that it has
sufficient profit
 Third – determine the value of
distribution
 Fourth – if conclude it to be unlawful
distribution - Buyer to request
indemnity against any adverse
consequence from the unlawful
distribution
 Seller’s concern if SSE not apply –
consult tax expert for advice
 Buyer’s share base cost will be
increased
 SDLT payable – (i) reduction in sale
price (ii) tax warranty/indemnity
ISSUES
2.5 VAT group
2.6 Shared IP (eg trade name)
3. Tax related issues
4. IP related issues (including IT
and Websites)
5. Customers related matters
5.1 Key customers contract
5.2 Book debts
6. Financial related matters
6.1 Loans with the bank
6.2 Intra-group/directors loan
6.3 Cross-guarantee
7. Environmental matter
8. Litigation
CONCERNS
 Joint and several liability on VAT remains
after acquisition - If Target forms part of VAT
group, needs to apply to HMRC for exit the
group
 Unable to continue using essential IPs –
adversely affecting Target’s value
 Any outstanding tax/dispute with HMRC
 IPs not properly registered – losing value of
IP
 Unable to use IPs - adversely affecting
Target’s value
 Decrease in value of IPs
 Change of control clause – giving customers’
right to terminate
 Term of the contract - how long it has left?
 Unable to collect book debts – affecting
value of Target
 Non-performing book debts - affecting value
and bad indication of business
 Transaction triggers EoD/Mandatory
prepayment – Target may not ready to repay
the loan + reduce its value
 No available assets to give to Buyer’s lender
– unable to obtain acquisition finance or
obtain at higher interest rate
 Outstanding intra-group loan – Avoid any
outstanding liability with the Group
 Outstanding cross-guarantee – Buyer doesn’t
want Target to remain liable for the Group’s
loan which it no longer has interest
 Defective title – Affecting Target’s value
 Liability re Contaminated land – costs of
cleaning-up could be huge
 Pending litigation affecting Target’s value and
reputation
SOLUTIONS
 Joint and several liability of VAT – (i)
CP (ii) VAT indemnity
 Essential IPs – fact finding during DD
 To continue using IPs - (i) CP to
transfer ownership of IP to Target or
doing a licensing agreement(ii)
reduction in sale
 Tax Covenant/Indemnity
 IPs not properly registered: DD
Process -
(i) IPs registrable and not yet
expired? (eg. Patents, trademarks,
registered design); CP to
register/renew before completion
(ii) If not registrable (eg. copy right,
KH), Buyer to get warranty on right of
use
(iii) 3rd party IP – make sure that
there is no change of control clause +
indemnity
 Any dispute re IPs matters: Third
party challenge on the right to use?
 Change of control– require the key
customer’s consent/confirmation
that it will not exercise change of
control clause
 Term:
(i) contract to be renewed before
acquisition
(ii) if not possible to renew, consider
the effect to Target’s profitability +
reduction in price or indemnity
 Unable to collect book debts –
indemnity of there is known unpaid
book debts
 Non-performing book debts –
warranty + disclosure on average
rate of repayment
 Triggers EoD/Mandatory prepayment
– CP to (i) obtain waiver or (ii)
refinance
 Free-up security – (i) refinance or (ii)
offering a replacement assets eg
Buyer’s guarantee
 CP – require the repayment
 CP - release of any cross-guarantee
 Seller/Buyer to prepare to provide
additional security if lender requests
 Defective title – get indemnity
 Contaminated land
(i) Further investigation
(ii) Ask to clean-up
(iii) Restructure to asset sale to leave
the property behind
(iv) walk away
 Litigation critical to business: either
(i) seek possible settlement or (ii)
walkaway from the deal
 ISSUES CONCERNS
ALLOCATION OF RISKS
Summary of Warranties and Indemnities
Warranty
“Statement of fact about Target made by
Seller”
Purpose:
(1) Elicit information
(2) Alternative ground for remedies; allow
Buyer to claim breach of contract
(remedies subject to contractual rules of
remoteness and mitigation)
Indemnity
“Promise made by Seller to reimburse
Buyer if a specified liability identified
during DD or as part of disclosure arises in
the future”
Purpose: Reimbursing loss to Buyer
(reimbursed amount not subject to the
rules of remoteness and mitigation)
Tax Covenants
“A series of general tax indemnities which
will reimburse Buyer for any tax liabilities
incurred by Target and outstanding at
completion”
Purpose: Specific indemnities re tax
matters; only used in the share sale +
commonly given together with tax
warranties (to elicit information)
Buyer
 No common law protection
 Broad warranty – based on DD
 Narrow disclosure – generally
warranties to be qualified only by
matters fairly disclosed
 Ensure that general disclosure reflect
actual searches/review of document
 Specific disclosure to be details and
clear as possible
 Push for express ability to sue even
with knowledge
 To be repeated on completion if split
exchange and completion + right to
rescind if any breach
 Seek a broad indemnity: usually
request if there is an identifiable
potential liability in Target
 Combination with ‘Retention
Account’
 Indemnity should be drafted to pay
to Buyer (as opposed to Target) to
avoid tax consequences (Zim
Properties)
 Watch out for Seller’s limitation of
Tax Covenants’ liabilities – remember
that indemnity should not be limited
by ‘disclosure’ or ‘mitigation’
SOLUTIONS
 Non-critical litigation: either (i)
reduction in price or (ii) indemnity
with retention account
[Note: Restructure to assets sale,
although would help leaving litigation
with the seller co, litigation would
damage goodwill of the business]
Seller
 Narrow warranty
 Broad general disclosure
 Specific disclosure to be details and
clear as possible
 Push for express prohibition to sue if
Buyer has knowledge
 Reduce liability:
(1) Negotiation
- No warranty given to matter out of
S’ control
- Clarity re period and scope of
warranty
(2) Disclosure letter
- Need a warranty clause to be clear
enough to make disclosure
(3) Vendor protection provisions
- Time limitation
- De maximus liability
- De minimus liability
 If to be repeated, update the
Disclosure Letter + accept the right to
rescind only to MAC in value of
Target
 Give specific indemnity
 Exclusion of liability may be made to
prevent double recovery eg.
Exclusion of Tax Indemnity if proper
reserves for such liability already
made in the Completion Account
 Seller may try to limit its liabilities
under Tax Covenants by ‘disclosures’
or requirement to mitigate
1. Warranty
MUST give
(Vital to B)
(1) Shares Warranties
 Shares constitute the whole of the
issued and allotted share capital and
are fully paid [Links to value of the
shares; Seller must give without
amendment]
 All shares are solely legally and
beneficially owned by Seller. There
are no liens, charges or
encumbrances (Links to value of the
shares; Seller must give or disclose
anything contradicts to this
statement]
(3) Book Debts
Since the Accounts Date no Group
Company has collected its debts other
than in the ordinary course of business
[Buyer wants to make sure that the
information about outstanding debts is
accurate as this deals with value of Target
– subject to disclosure]
(4) IP Rights
 Sch [x] contains accurate details of all
IP rights registered in the name of
each Group Company [Vital to Buyer
as IP Rights form significant value of
the Target; no amendment needed as
the IP Rights already limit to the ones
listed in Sch]
CAN give in principle NOT give
(amend to limit effect) (S has no control)
(2) Accounts
 Accounts for each of the last six
accounting periods show a true and
accurate view [Links to the value of
Target but should amend; Seller
should limit to 1 period to reduce
disclosure burden + the latest
accounts should be the most relevant
one; should not warrant beyond the
standard of “true and fair view” (s393
CA06)]
(3) Book Debts
 Since the Accounts Date no Group
Company has collected its debts other
than in the ordinary course of
business …all debts owing to any
Group Company will be recover in full
[Seller should not give warranty re
collection of debt in the future as it
has no control; Seller may offer to
warrant the historic recoverability
instead “within the last twelve
months, x% of trade debtors have
repaid debts in full within y days]
(4) IP Rights
Each Group Company owns or has a right
to use all IP required … and does not
infringe any intellectual property rights of
any third party [Seller should either (i)
delete the infringement part since there
are other IP rights that it does not own; so
cannot warrant if it infringes the rights of
third party or (ii) limit to its knowledge]
(5) Litigation
 No Group Company is engaged in any
litigation whether actual, pending or
threatened and no Group Company is
engaged in any dispute likely to result
in litigation or any other type of
dispute whether a formal or informal
nature [Seller can give in principle but
should amend: (i) delete ‘threaten’ –
very informal/may not have
records/unable to disclose; (ii) delete
the last bit as it’s ambiguous. If Buyer
concerns a ‘formal’ proceeding, it
should be covered by defining the
term ‘litigation’ to cover any formal
ADR procedure]
(6) Stock
 Stock owned by each Group Company
is in good and satisfactory condition
and is all capable of being sold by the
relevant Group Company [Seller has
no control over the market]
 MUST give CAN give in principle NOT give
(Vital to B) (amend to limit effect) (S has no control)
(9) Clients
 Not more than 2 per cents of any
Group Company’s turnover has in any
of the six financial years ending on the
Accounts Date been attributable to
any single client [% should reflect the
number of actual key customer of
Target]
 No person who was a client…has
ceased or intends to cease… [Should
limit to ‘material’ client who has given
notice to cease its business]
(10) Employees (10) Employees
 Full details of all employees of each  No senior employee of any Group
Group Company are set out in Sch Company will leave his or her
[Full details are ambiguous and may employment as a result of acquisition
be too onerous + should be … [“senior employee” is unclear; it is
‘anonymised data’ to comply with outside Seller control. Alternatively,
DPA] Seller may give warranty that no
notice has been given by [named key
employees]].

 Disclosure Letter – Qualify the warranties by the matters disclosed in this letter
o Standard of disclosure
(1) Qualified by matters disclosed
 Question of whether or not disclosure effectively qualifies the warranties will depend on the level of disclosure
that Buyer agreed to accept (Infiniteland v Artisan Contracting and MAN Nutzfahzeuge v Freightliner)
(2) Qualified by matters ‘fairly’ disclosed
 Insufficient if only disclosed the means of knowledge that enable the party to work out the fact (Levison v Farin)
 Need positive statement (as opposed to expecting Buyer to infer from fortuitous omission) eg. left out the expired
licence (Daniel Reeds v EM ESS Chemists)
 Insufficient if only referred to a source of info which is a complex document, although the diligent enquirer might
find (New Hearts v Cosmopolitan Investments)

o Buyer’s aware of non-disclosed matters

 The claim still subject to the disclosure language (Infiniteland)
 If the contract is silence – the court may penalise by awarding less damages, assuming that the purchase price
already reflect the knowledge

Structure Scope
(1) General disclosure All matters revealed by the company search/corporate records
 Limit to recent past (1-2y)
 Buyer to ensure that searches mentioned have done; Before (ie 3days) the date of the
Disclosure Letter (practical difficulty if done at the date of the Disclosure Letter)
 Buyer to ensure that corporate records are made available + actually reviewed in details
All matters that are apparent from property inspection
 Buyer to reject if possible; even with inspection it would be unrealistic to uncover all matters
+ unclear as to what ‘apparent from inspection’ mean
 Alternatively, general disclosure can be made on the surveyor’s written report; the report
to be annexed to disclosure letter
Any matters referred to in correspondence
 Buyer to reject if possible; vast amount including irrelevant bits; not make sense for some
correspondence, eg. draft disclosure letters to qualify the warranties
 Alternatively, disclosure can be restricted to certain identified correspondence + included in
disclosure bundle
Any matters disclosed in due diligence
 Buyer to reject; DD paid by Buyer for the purpose of making decision whether to buy Target;
Seller should not be allowed to rely on DD to relieve its liabilities
 At the time of DD, Buyer may not understand the significance issues – any significant matters
should be made in specific disclosure
 If Buyer’s aware of any untrue warranty via DD – may affect ability to claim Seller
Any matters in public domain
 Structure Scope
 Buyer to reject; extremely broad; Buyer not necessarily aware of all matters; credibility in
question
 Alternatively, Buyer may accept public domain info if refer to specific public registers
All information in the disclosure bundle
 Buyer to reject; Seller should specifically point out the matters it wishes to disclose
 Alternatively, delete ‘matters referred to’ as they are something only mentioned but not
actually contained in the disclosure bundle
Contents of Data Room
 Buyer to reject; too broad
 However, might be difficult for Buyer to resist in auction sale; at least try to be as clear as
possible, eg. Documents must be properly filed, cross-reference; definition of Data Room
must be clear
(2) Specific Disclosure  Not subject to negotiation but needs careful review + clarification
 Buyer should never accept disclosure to qualify liability under any indemnity including Tax
Covenant
(3) Annexure  Copies of all relevant documents referred to in the disclosure letter
 Two identical copies; each for Buyer and Seller

 Remedies of breach of warranty

Breach of warranty Misrepresentation Fraud Act S89 FS Act
Application Share + Asset Share + Asset Share + Asset Share only
Claimant Buyer, Assignee or a third Same Same Same
party under CRoTPA
Elements (1) Inaccurate warranty Fraudulent misrep (1) Rep/Warranty (1) Disclosing
(2) Not qualify by disclosure  No genuine belief in gave dishonestly statement that
letter the truth of statement (2) by making a false knew/reckless to be
Negligent misstatement statement or fails to false, misleading
 Unable to show disclose info that it (2) dishonestly
reasonable grounds has legal duty to do conceal material
for believing that the so facts
statement was true (3) intend to make a
Innocent misrep gain/cause loss to
 Misrep without fraud Buyer
Remedies Contractual damages (subject Fraudulent misrep Criminal penalties Criminal penalties
to remoteness and  Rescind + damages for
mitigation) tort of deceit
 Losses flow from
deceit; NOT subject to
foreseeability
 Smith New Court v
Scrimgeour: Damages
= difference between
share price originally
paid and the amount
recovered on the
subsequent sale (as
opposed to the
damages based on the
actual market value of
the shares on the
acquisition date)
Negligent misstatement
 Same as fraudulent
misrep but only needs
“negligence”(s2(1)
Misrep Act)
Innocent misrep
 Rescind or damages in
lieu (s2(2) Misrep Act)
2. Indemnity
 (1) Indemnity directly to Target
o Logic because Target is the one who’s suffered loss
o Tax consequences: Target has to pay tax on the indemnity amount received (Zim Properties)
 (2) Indemnity directly to Buyer
o Tax consequences – HMRC treated as adjustment to the consideration; less capital gain for Seller but not refund to Stamp
Duty

3. Vendor protection provisions

Time limit De maximis De minimis

Purpose Limiting the period during which
Seller would be subject to liability
Default  6y for contract and tax
position (although after 1 Apr 2010 the
period is reduced to 4y for
innocent matter)
 12y for deed
Position Buyer
- At least limitation period under
law plus extra time for a claim: (eg
7y)
- Alternatively, should be sufficient
to allow Buyer to audit Target after
acquired eg. 2-3 full audit year
Seller
- Lower than limitation period
- At least try to be specific to each
types of claim (General warranties
vs Tax warranties)
- claim
Limiting financial exposure of Seller
Whatever Buyer can prove
Buyer
- As high as possible – up to
purchase price
- Splitting the maximum per types
of claim
Seller
- Lower than the Purchase Price –
may be agree around 50-75%
- Liability may also be limited by
any amount claim under insurance
Prevent Buyer from bringing trivial
claim
Buyer can bring a claim for any
amount
Buyer
- Threshold should be kept
minimum; commonly 1% for
aggregate threshold; should be
worded ‘at least’ rather than ‘equal
to’
- Once reach the threshold, Buyer
should be able to claim the full
amount
Seller
- Two layers of de minimis:
individual claim and aggregate
- Allow Buyer to claim only for the
amount in excess to threshold

SHARE SALE AGREEMENTS

TERMS Buyer Seller

1. Sale of shares ‘Full title guarantee’ = implies certain covenant
in LPMPA 1994 ie Seller has right to sell shares +
will do all it reasonably can to pass title to Buyer
+ shares are free from all encumbrances and 3rd
party rights
2. Adjustment to completion  If agreed, include Complete Account
payment mechanism
 Ability to set-off the purchase price against
any claim under warranties and indemnities
3. At completion Listing all actions/docs required for completions:
 Stock transfer
 Appointment of new directors
 Resignation of existing directors
4. Warranties See above
 Qualification of Seller’s knowledge may be
acceptable but not too limit to certain group
of people
 Buyer’s knowledge (actual, constructive or
imputed) should not prejudice a claim
 Benefits of Warranties should be able to
assigned to Buyer’s subsidiary
 Acceptable to request to take reasonable
endeavour to mitigate loss re warranties
(but not indemnities)
Should be acceptable
 Ensure that the Complete Account
mechanism is acceptable
 If accepting the set-off clause, ensure to be
as specific as possible.
Ensure that all actions/docs listed can be
satisfied
See above
 Qualify by ‘so far as the Seller aware’ –
Ideally to list out individual who’s aware of
the fact [Compromise - having made all
reasonable and careful enquiry]
 If Buyer had knowledge, ideally it should not
be able to claim. Compromise – to allow the
claim if Buyer did not appreciate the
significance of the fact + limit to
constructive, or imputed knowledge only
 Require Buyer to use best endeavour to
mitigate loss
TERMS
5. Vendor’s protection clauses
5. Indemnities
6. Restrictive covenants
7. Entire agreement clause
8. Split exchange
Buyer
Time limit
 Ideally limitation period + 1y – to allow
sufficient time for Buyer to claim Seller
De maximus
 Ideally the purchase price
De minimus
 Ideally the aggregate mini claim should not
be more than 10% of purchase price, 1% for
individual claim
See above
 Limited protection under common law
(Trego v Hunt) so must include:
(1) A non-compete clause (1-3y)
(2) A non-solicitation of clients, suppliers
and employees
(3) Confidentiality (no time limit needed)
(4) Prohibition to use names
(5) A severance/blue pencil clause
 Two issues:
(1) Enforceability: (i) Necessary for
protecting Buyer’s legitimate interest and
(ii) Reasonable in geographical scope,
business scope and duration
(2) Competition law: If trade restraint
provision, fines may be imposed under
competition law
 Extend the same to Target’s group (if Seller
not a holding, request a holding to be party
to ensure compliance)
 Standard clause
 CPs included + long stop date
 Include a provision re how to run a company
between exchange and completion:
- Restriction on incurring significant
expenditure or disposing material assets
- warranties remain the same
 Ability to rescind contract upon breach of
contract
Seller
Time limit
 Ideally 2-3y to allow 2 full audits – sufficient
for problems to surface
De maximus
 Ideally 50%
De minimus
 Ideally two prongs of protection: individual
claim and aggregate claim
See above
Market standard to include restrictive
covenants; mindful to review the scope and
duration of these clauses
Needs 4 elements for it to be enforceable:
(1) Statement that the agreement constitutes
the whole agreement [To prevent Buyer to rely
on pre-contractual communications]
(2) Acknowledgement of non-reliance/no
remedy re pre-contractual representation [To
satisfy the requirement under Thomas Witter
that tortious claim must be expressly excluded]
(3) Statement that all remedies are contractual
[To prevent Buyer seek to make tortious claim on
the ground that warranty forms part of
representation prior to the contract and seek to
claim misrep on such basis (Thomas Witter)]
(4) Statement that not excluding liability for
fraud [To satisfy the requirement of
reasonableness (Thomas Witter and MAN
Nutzfahrzeuge)
Note obiter comments of Chadwick LJ in EA
Grimstead v McGarrigan that Buyer should be
estopped from reliance on any reps not included
in the contract without specifically mentioned to
contractual/non-contractual claim + carve-out of
fraud should not be required: (i) commercial
certainty +(ii) price reflecting commercial risks]
 Able to update the disclosure letter to
reflect any change
 Limit ability to rescind the contract to
material event that severely affect value of
Target
 EMPLOYMENT AND PENSION
SHARE SALE
Effect No change of employer; the only effect it may have
is leaving a group pension scheme
DD issues  Data protection: DD on anonymous basis
 Full details on salaries, benefits and pensions
 Previous terminations that may give rise to
claims: (i) Unfair dismissal (dismiss without a
fair reason); (ii) Wrongful dismissal (dismiss in
breach of employment contract eg. not giving
a full notice)
 Key contact persons – check golden
parachute clause + ensure long notice period
+ valid RC + considering offering incentive
package
Post-completion issues Harmonising T&Cs of employment
 Only make changes with employees’ consent
 Otherwise constitutes constructive dismissal;
hence wrongful/unfair dismissal + RC may not
be enforceable
Redundancy
 Although not an unfair dismissal, Employer
must consider the costs of termination and
risks of RC unenforceable
BUSINESS SALE
(1) Employees transferred automatically (Reg 4
TUPE 2006):
 Employees who are employed/assigned
to work in the transferred business (Reg
4(1), Botzen, Duncan Webb)
 Including employees terminated
immediately before the transfer (Reg
4(3)) (which would automatically be
unfair dismissal (Reg 7(1))
 Employees may object to the transfer
(Reg 4(7)) = termination but not unfair
(Reg 4(8))
(2) T&Cs of employment and all accrued rights
and liabilities will be transferred to Buyer)(Reg
4(2)) (except for liabilities under occupational
pension scheme (Reg10)and criminal
liabilities(Reg4(6))
(3) T&Cs of employment cannot be changed,
unless employee’s consent +:
 reason not related to transfer,
 reason related to transfer but (i)
sole/principle reason re ETO, (ii) T&Cs
permits variation, (iii) variation entirely
positive to employee or (iv) relate to
insolvency rescue situation (Reg 4(4))
(4) Seller and Buyer jointly and severally liable to
obligation to inform employees and consult (if
measures are planned) before transfer (Reg 13,
15)
 Similar to share sale with additional issues
below
 Compliance with duty to inform and consult
(Reg 13) – even minor measures would
require consultation – Buyer and Seller have a
joint and several liable up to 13wks’ actual
pay per affected employee (protective award)
 Shared employees: To determine whether
they are transferred or not, consider (Botzen
and Duncan Webb) (Reg 4(1))
(i) Amount of time spent in each business
(ii) value given in each business
(iii) contractual term
(iv) allocation of costs of employee’s service
 Employees terminated immediately before
the transfer (Reg 4(3)) – also included in the
transfer, unless the sole/principal reason is
economic, technical or organisation entailing
change in workforce (ETO reason)
Harmonising T&Cs of employment
 Not possible, unless employees’ consent + the
changes are:
(i) Part of wider reorganisation (ie not related
to the transfer) - should be done in the next
benefits review rather than implement
immediately
(ii) Sole/principal reason is an ETO eg. market
situation, production process (merely
harmonising T&Cs is not)
 (iii) Contract permits the changes (but cannot
circumvent TUPE)
(iv) Entirely positive to employees (although
relate to the transfer)
(v) Due to relevant insolvency proceedings of
transferor
 If amend in breach of TUPE = constructive
termination, employees may bring
wrongful/unfair dismissal + RC may not be
enforceable

PENSION
1. Occupational pension schemes
 A scheme set up and operated by Employer to provide benefits to Employees on retirement or death; operated under a trust
 Two types
o (1) Defined contribution schemes (or ‘Money Purchase Scheme’)
 Employer’s liability is fixed – agree in advance what level of contribution it will provide for employee who
joins the scheme; employee will also contribute at the same level
 At the retirement, money will be used to by an annuity (ie a financial product that provides income stream
until death) but since 6 Apr 2015 – a retired employee can drawdown some/all of the money and invest
freely.
o (2) Defined benefit schemes (or ‘Final Salary Scheme’)
 Employer’s liability not fixed but will be subject to a fixed percentage on the employee’s final salary;
depending on the number of employee’s service years.; employee may or may be not required to contribute
to the scheme – whatever it is the Employer will have to pay the balance of annuity
 Every 3y the scheme actuary will prepare a report to show the size of the scheme + expected liabilities +
recommend appropriate level of contribution to ensure that it’ll meet liabilities
 Very uncertain – too many variables eg. the length of employee’s service, performance of stock market and
the cost of annuity at the time of retirement
 Occupational pension scheme may be operated for a single employer or a group scheme
 It has to be HMRC registered pension scheme in order to get tax benefits
2. Personal pension scheme
 An arrangement between an individual member and an insurance company – but can be funded by the member alone and the
member’s employer
 Types of personal pension scheme
o (1) Group personal pension schemes
 Employer arranges with an insurance co which allows Employees to set up personal pensions schemes and
Employer will make contributions on their behalf
o (2) Stakeholder pension schemes
 Designs to allow flexible contributions by employees
3. National Employment Savings Trust
 Government-run, defined contribution pension schemes

EMPLOYER’S OBLIGATIONS TO PROVIDE PENSION BENEFITS

 Auto-Enrolment under the Pensions Act 2008
o Requiring Employer to enroll an eligible jobholder as active member of ‘a qualifying scheme’
o Both Employer and Employee are required to make contribution – although Employee can opt out of the scheme,
Employer is required to re-enrol for every 3y
o Qualifying scheme can be either occupational or personal pension scheme, provided it is HMRC registered scheme
 ASSETS SALE
KEY DIFFERENCES FROM SHARE SALE
ISSUES CONCERNS
1. Employment issues
1.1 Employees  Uncertain as to which employees would be
transferred under transferred under Reg 4 TUPE 2006 - 2 limb tests:
TUPE (1) Employees employed under or assigned to
work under the business transferred (NOT include
freelancer, shared employees) (2) Employees
immediately terminated before the transfer
 Concerns 3 groups of employees: (i) shared
employees (ii) freelancer (iii) employees
terminated immediately before the transfer
1.2 Freelancers or  Uncertain whether freelancers will be categorised
other personal services as employees
1.3 Changes of  Trigger consultation requirement - Any measures
employment terms planned to be implemented after the transfer must
be consulted with the representative employee (or
union rep) (Reg 13 TUPE 2006)
 Restrictions on the changes:
(i) Require employee’s consent
(ii) Changes must satisfy conditions in Reg 13
 Changes against restrictions result in constructive
dismissal - changes to be regarded as fundamental
breach; the affected employee can resign (treated
as constructive dismissal); then claim for unfair or
wrongful dismissal
1.4 Pensions  Transfer of pension: Occupational pension
liabilities do not transfer in assets sale BUT
personal pension liabilities do transfer (Reg 10
TUPE).
 Buyer’s obligations to provide pension: No
obligation under TUPE; but obligation under
Pensions Act 2004
 Liability for deficit of final salary scheme: A
company ceases to participate in a group final
salary scheme still liable for proportion of any
deficit which exists at the time it stops
participating (s75 Pensions Act 1995) - also apply
in business sale if all employees transfer to Buyer
*BUT the liability remains with Seller*
2. 3rd Party Contracts  Key contracts not transferred to Buyer at
completion: any prohibition against
novation/assignment? Any specific procedure
required?
SOLUTIONS
 Deal with uncertainty - Buyer and Seller
to agree on the list of employees that
believe to be transferred under TUPE
 Parties to apportion financial risk by
‘cross-indemnities’ – 2 parts (i) a party is
left with unexpected employees it may
want to dismiss + recover relevant costs
from the other party nd (ii) allocate the
obligation to reimburse for anything done
pre/post completion
 Deal with uncertainty – Buyer may
terminate all freelancers + seek indemnity
from Seller
 Pure freelancers – Contract must be
novated/renegotiated
 Ensure compliance: Buyer to:
(i) ensure inform + consult obligation
properly performed in sufficient time
(ii) wait for certain period after the
transfer before effecting the change
(iii) enter into a settlement agreement
with employees to whom it wishes to
change the term to terminate the
employment contact and waive the claim
+ engage in new terms
 Buyer’s obligations to provide pension:
Buyer not required to provide the same
scheme/contribution. Buyer only needs to
set up a pension (either (1) a defined
benefit scheme (2) a defined contribution
scheme or (3) a stakeholder scheme) +
make minimum contribution
 Buyer’s obligations to provide pension:
Buyer needs to ensure that it would
comply with the relevant regulation post-
completion
 Liability for deficit of final salary scheme:
s75 liability will arise and all employees
transferred to Buyer but the liability will
remain with Seller
 Ensure that transfer of key contracts at
completion:
(i) CP – to novate/assign key contract
before completion;
(ii) If unable to novate/assign, Buyer to
enter into a fresh contract with a third
party
 Minor contracts - acceptable to
assigned/novated after completion as they
are time consuming process + jeopardizing
confidentiality of the deal:
(i) Seller’s obligation to use
best/reasonable endeavor to
novate/assign
(i) If unable to assign:
- Seller to hold money paid by 3rd party on
trust
 ISSUES CONCERNS
3. Book debts  Unable to collect book debts - Buyer’s options
wants to:
(1) leave them with Seller
(2) leave them with Seller but appoint Buyer as
collecting agent
(2) transfer to Buyer
4. IP Rights  Unable to transfer IPs at completion - Buyer to
check whether Seller is an owner and so able to
transfer IP rights to Buyer at completion
 If IP rights belong to 3rd party, consider whether
the licence agreement can be assigned, novated or
sub-licence
 Although litigation will stay with Seller, potential
issues on costs of replacing IP and reputation
5.  Defective title - Buyer to conduct title
Land/Environmental investigation
Matter  Liability for contaminated land - potential liability
as Class A or Class B persons (likely to be Class B as
a purchaser of contaminated Land
 Liability for contaminated land could be huge ie
costs of cleaning up the land
7. Shares
8. Other tangible  Ensure that they are listed in the acquisition
assets agreement
9. Apportionment  Apportionment to the fixtures would affect tax
liabilities of Seller and Buyer
 Seller prefers low apportion to value of fixtures; to
avoid incurring a balancing charge (ie if the value is
higher than the Tax Written Down Value)
 Buyer prefers high apportion to value of fixtures in
order to benefit from capital allowance
10. VAT  Seller to account for VAT to HMRC if Buyer not
comply with VAT’s exemption condition - VAT
exemption available for transfer of business on
going concern basis, provided that (i) Buyer will
use the assets for the same kind of business
without significant break and (ii) Buyer registers
VAT
 VAT on rent – Although rent is not subject to VAT
but Seller may opt to tax and if it has done so
Buyer may have to pay VAT on the consideration
attributed to the property, unless it has opted to
tax
11. Cash shell Seller  Buyer unable to claim Seller after the completion
- Seller may be liquidated so Buyer would have
concerns on:
SOLUTIONS
- Buyer undertakes to perform contract +
indemnity if fails
 Buyer prefers - to leave book debts with
Seller as it is uncertain whether the debt
can be collected BUT having concerns re
building relationship with customers +
Seller may damage relationship; if
choosing this option, Buyer needs to get
undertaking that Seller will not initiate
proceedings/allow Buyer to buy debts (at
discount)
 Seller prefers - to transfer as it might not
have resources to collect the debt; if
choosing this option, Buyer to negotiate a
discount + ensure the assignment is made
in writing + notify debtor
 Compromise - to leave debts with Seller
(to bear risks) but Buyer acts as collecting
agent to have control over relationship
(charging fees + admin expenses)
 Transfer of IPs: 2 parts (i) proper
assignment and (ii) register under Buyer’s
names
 3rd party licence: (i) Sub-licence from IP’s
owner or (ii) assign/novate
 Transfer of land needs TR1 + register at
Land Registry
 Contaminated land issue
(i) Further investigation
(ii) Leave the assets behind (if not
detriment to business)
(iii) Ask Seller to clean-up
(iv) Indemnity + parental guarantee
(v) walk-away
 Transfer of shares needs a stock transfer
form + register in a member register book
 Transfer by physical delivery
 Commercial point
 Seller’s protection - (i) Assets price to be
exclusive of VAT (ii) Buyer undertakes to
satisfy the conditions (iii) Buyer
undertakes to pay VAT if not satisfy
 VAT on rent – Buyer to opt to tax on rent
 Buyer’s protection -
(1) ask S/H of Seller to be party to the
acquisition agreement
 ISSUES CONCERNS
(1) whether and how Seller can meet
warranties/indemnities obligations
(2) restrictive covenants become worthless
MANAGEMENT BUYOUT
MBO
 A purchase of a business or the entire issued share capital of a company by the management of such company
 Involved a significance element of debt; so it is also known as leveraged buy-out
PROS AND CONS OF MBO (MANAGEMENT PERSPECTIVE)
Pros
Having share in capital growth on exits (in addition to dividend
and normal salary)
Greater control over direct business
Mgmt are incentivised to grow the business (subject to ratchet
provision)
PEF investor brings business and financial expertise
STRUCTURE
RELEVANT DOCUMENTS
(1) Business Plan (prepared by Mgmt)
 Details of products and services
 Past accounts
 Details of existing business and key contracts
 Proposed action plan for business
 Profit projections
 Market information
 Mgmt’s CVs
(2) Investment Agreement + Disclosure Letter by Mgmt:
 Parties: (i) PEF (ii) Mgmt and (iii) NewCo1
SOLUTIONS
(2) ask S/H to give restrictive covenant
directly
(3) use the retention account
Cons
Investing a large proportion of personal wealth; risk losing entire
wealth
Control may actually be restricted by PEF (through appointment
of chairman, VETO rights and restrictions)
Mgmt’s personal liability for breach of warranty under the
Investment Agreement (although in practice PEF is unlikely to
pursue the claim)
Commitment to stay with the company for a long period;
alternatively, they may be forced to step out upon PEF exiting the
investment
Additional tax liabilities due to deemed income from shares
received
PEF may exit in 3-7years; Mgmt may be forced to be out
Before completion:
(1) Transferring subscriber shares in Newco1 (Investment
Vehicle) to Mgmt
(2) Transferring subscriber shares in Newco2 (Acquisition
Vehicle) to Newco 1
At completion:
(1) Funding in Newco1 by Mgmt and PEF
(2) Money passed from Newco1 to Newco2 by intragroup
loan or shares capital
(3) Bank loans to Newco 2 in return for security from Target,
NewCo2 and NewCo1
(4) Acquisition of assets/shares from Seller
  Reserved matters:
o Veto rights re issues of shares, change of AoA, change of nature of business
 Ratchet clause:
o Purpose: Too incentivise Mgmt to make a transaction a success (ie to achieve a target IRR)
o (i) Negative ratchet
 If the target IRR is achieved, Mgmt’s proportion of the ordinary share capital will remain the same
 If the target IRR is not achieved, Mgmt’s proportion of the ordinary share capital will be diluted (the number
of shares remain the same) in accordance with the proportion agreed in the Investment Agreement by PEF
converting the convertible preference shares/loan notes into ordinary shares.
o (ii) Positive ratchet
 Similar to negative ratchet, but instead of unchanged/diluted proportion, Mgmt will be rewarded by
increasing their proportion of shares (without changing number of shares)
 Mgmt (as directors) clause: Restrictive Covenants and Garden Leave
(3) Articles of Association of NewCo1
 Mostly reflect the terms in Investment Agreement, includes rights of S/H on return of capital, dividend entitlements, pre-
emption rights on the transfer of shares, drag along/tag along, good leaver/bad leaver provisions, and ratchet arrangement
(4) Service Agreements
 Parties: (i) Mgmt and (ii) NewCo1
 Key clauses:
(5) Acquisition Documentation + Disclosure Letter by Seller
 (i) Acquisition Agreement between NewCo2 and Seller
 (ii) Transfer Documents eg. TR1, Stock Transfer Form, Assignment, Novation
(6) Banking Documentation
 Facility Agreement
 Security Documents (Debentures and Share Pledge)

CONCERNING ISSUES IN RELATION TO MBO

(1) Private Equity Fund (PEF)
 Return on the MBO
o Before deciding to invest in the project, PEF will assess whether it is commercially viable by using the internal rate of
return (IRR). The IRR represents the growth rate of the investment taking into account the period for which the money
is actually invested in the venture and the total return received on the investment through dividends, interest on loan
stock and the capital gain made on the exit.
o The return is made up of a combination of: income return (dividends or interests) and capital gain
 Exit
o A means for PEF to release its investment by selling its shares; usually within 3-7y from the investments
o Successful exit can be done by:
 (i) Floatation of Newco1
 (ii) Sale of Newco 1 to a trade buyer
 (iii) a secondary or further buy-out
o Unsuccessful exit:
 (i) A sale of PEF’s shares to Mgmt or to the company (shares buyback); or
 (ii) Liquidation of Newco1
 Control
o Ensure certain level of control to safeguard investment
o Control through (i) Investment Agreement and AoA and (ii) representatives in the board
 Risks
o Mitigate by:
 (i) Due diligence + information provided by Mgmt
 (ii) Warranties and indemnities from Seller
 (iii) Warranties and indemnities from Buyer
 Tax efficient structure
o PEF can choose either to invest in form of (i) preference shares or (ii) loan notes
o Loan notes would be more tax efficient than shares as interest is tax deductible, subject to transfer pricing rules (“thin
capitalisation, ie interest payable on arm’s length terms. Otherwise, the excess interest would not be permitted to
deduct
(2) Management
 Investment value
o Ensuring reasonable share of value in the investment company
 Incentives and returns
o Capital returns from shares, subject to ratchet arrangement
o Income returns from salary and other benefits
 Conflicting directors’ duties as Mgmt would still be directors of Seller as well as directors of Buyer (ie Newco2):
(i) Confidentiality obligation under employment contract
(ii) Statutory duties under CA 2006
 o S172 – promote success of the company
 “Purchase price of the assets” should be carefully negotiated; ideally with a non-conflicted director;
otherwise a minute should be carefully taken to support that Mgmt still perform their directors’ duties
o S174 – exercise reasonable care, skill and diligence
 Still devoting energies in managing Seller’s business; not to spend all times with MBO
o S177 – declare interest in the proposed transaction
 Risks from breach of warranty under the Investment Agreement
o Warranty re accuracy of the business plan/information is required to be given to PEF
o Mgmt needs to ensure that they are not only accurate but also objectively verifiable

TAX CONSIDERATION
(1) Management
 (1.1) Potential income tax liability
o Risk that HMRC treats the shares that Mgmt received in MBO as ‘disguised employment income’ (ie if tax charged, it
will be on an income tax rate basis)
o But if the shares are issued to Mgmt in accordance with BVCA MOU, shares will be treated as capital gain tax (not
income tax) which is more favourable to Mgmt as the tax rate is lower
o *Conditions of BVCA MOU* (‘safe habour provisions’)
 If the shares subject to ratchet:
 (i) the shares are ordinary shares
 (ii) leverage (in a form of pref. shares or loan notes by PEF) must be provided on commercial terms
 (iii) Mgmt must acquire the shares at the same time as PEF
 (iv) Mgmt must be fully remunerated for the work they do by salary/bonuses under employment
contract
 (v) the ratchet must vary according to the performance of the company, not Mgmt
 (vi) the ratchet provisions must exist at the beginning ie. at the time that PEF acquires the ordinary
shares
 (vii) Mgmt must pay a price for their maximum equity share on day one as if the ratchet target had
been fully achieved
 If the shares are not subject to ratchet:
 (i) the shares are ordinary shares
 (ii) leverage (in a form of pref. shares or loan notes by PEF) must be provided on commercial terms
 (iii) Mgmt must acquire the shares at the same time as PEF
 (iv) Mgmt must be fully remunerated for the work they do by salary/bonuses under employment
contract
 (v) the price paid by Mgmt must not be less than the price paid by PEF
 (vi) Mgmt’s shares must not have any features that give them rights not available to other holders
o Consequence of satisfying ‘safe habour provisions’ = capital gains tax will apply instead of
 (1.2) Interest relief on borrowings made by Mgmt
o Interests can be set-off against income, provided that the following conditions are met.
o *Conditions*:
 (i) Loan to an individual + use to acquire ordinary shares
 (ii) at the time the shares are acquired, that Company be a close company; ie. controlled by 5 or fewer
participators or by S/H all of whom must be directors; hence Mgmt must subscribe shares before PEF
 (iii) Company must exist for the purpose of carrying on a commercial trade throughout the investment
period/the period that the interest is paid on loan
 (iv) the individual must either have owned the shares in the company + involved in actual management of
the company or hold material interest (5% or more)
(2) Investment Company
 Transfer pricing rule
o More tax efficient to use the convertible loan notes as opposed to preference shares as dividend is not tax deductible
expense
o The deductibility of interest subject to ‘transfer pricing rule (thin capitalization rule)’ ie the interest paid to PEF must
be on commercial term. Otherwise, the interests in excess of the market rate would not be deductible.

MBO DOCUMENTS

Clauses
1. Key man insurance
2. Reserved matters
Details
 Investment Agreement
 Purpose: Protect Investment Co in the event that a key manager is unable to work
 Another mechanism to protect investment as MBO is investment in management as much as
in the company
 Investment Agreement + AoA of NewCo1 and NewCo2
 Purpose: Protecting PEF investment; control over Mgmt of NewCo1 (Investment Co)
 PEF would want to extend this to NewCo2 (Acquisition Co) which is a trading company as well
 Clauses Details
3. Deed of Adherence  Investment Agreement
 Purpose: Requires incoming S/H to be bound by the terms of Investment Agreement (although
it will be automatically be bound by AoA upon becoming S/H)
4. Warranties/Disclosure  Investment Agreement + AoA of NewCo1
Letter  Purpose: Eliciting information and alternative ground for remedy (although unlikely to actually
sue Mgmt due to lack of financial basis)
 Warranties given by Mgmt would balance with the ones given by Seller – anything that within
Mgmt’s control eg. business plan would be given by Mgmt
 ‘Disclosure Letter’: PEF may try to get ‘quasi-warranties’ ie warranties that any matters
disclosed in the disclosure letter is true
 Mgmt: Although prefers to delete but with less bargaining power may end up qualify by
‘materiality’ or ‘knowledge’
5. Drag along  Investment Agreement + AoA of NewCo1
 Purpose: Allow Majority S/H to force Minority S/H to sell their shares; hence achieve an exit in
the future – not relying on S979 CA06 ‘Squeeze Out’ because: (i) it only succeed if Mgmt hold
less than 10%; (ii) time-consuming and costly process
 Negotiation points: Shareholding threshold that can trigger drag along provision and the term
should not be less favourable than those shares sold by PEF
6. Tag along  Investment Agreement + AoA of NewCo1
 Purpose: Allow Minority S/H to sell their shares to the purchaser when it is received an offer
from Majority S/H – not relying on s983 CA06 ‘Sell Out’ with the same reason as tag along
 Negotiation points: PEF may resist and argue that it’s unlikely that anybody will buy less than
100%
7. Good leaver/Bad leaver  Investment Agreement + AoA of NewCo1
 Purpose: (1) To incentivize Mgmt to stay with MBO for a minimum period of time; only if Mgmt
stay for a specified period it would considered to be a good leaver and entitled to the higher of
market value and nominal value.; a bad leaver will be entitled to the lower of market value and
nominal value and (2) deal with Mgmt in a position as S/H (as opposed to an officer)
 Negotiation points: PEF prefers the narrow definition of good leaver + Mgmt also wants to
ensure that their interests are properly protected against a bad leaver
8. Restrictive covenants  Service Agreement + Investment Agreement
 Purpose: To protect business and goodwill of NewCo1 (common law protection is very limited)
 To be enforceable, the RC must be reasonable in scope and duration and necessary to protect
legitimate business interests – otherwise VOID
 Why include in Investment Agreement? More likely to be enforceable in investment rather than
service contract – allow longer duration + in case they are unenforceable in the service contract
because employment terminated in breach
 Negotiation points: Period of RC (3-6m in Service Contract, 9-12m in Investment Agreement)
9. Garden leave  Service Agreement + Investment Ageement
 Purpose: To make Mgmt stay at home during his notice period – preventing Mgmt to be in
contact with customer/supplier during the notice period + overcome the problem of
unenforceable RC as RC will still be enforceable during garden leave period
 Negotiation points: PEF and Mgmt both want to include this provision to protect its interest
against terminated manager – so inclusion not controversial; the period for garden leave could
be controversial because the terminated manager will be paid during such period

COMPLETION
1. Minutes of Meetings for Completion
 Board Minutes of NewCo1 (Investment Company)
o (1) Documents produced to approve at the Meeting
 (i) Investment Agreement
 (ii) Disclosure Letter from Mgmt to PEF (as it was attached to Investment Agreement)
 (iii) An Intra-group Loan Agreement/Subscription Agreement with Trading Company
 (iv) Service Contracts to be entered into between NewCo1 and Mgmt
o (2) Written resolution for AoA
 Circulated to S/H
Board adjourned
 Only counting the votes of Mgmt as PEF not yet subscribe to the shares
o (3) Subscription of Shares
 Mgmt to subscribe for further shares (a number of shares deducting by the existing shares)
 PEF to subscribe shares
o (4) Written resolution for changing name
  Circulated to S/H
Board adjourned
 Both Mgmt and PEF can vote
o (5) Authorising a representative of NewCo1
 Board Minutes of NewCo2 (Trading Company)
o (1) Documents produced to approve at the Meeting
 (i) Acquisition Agreement
 (ii) Disclosure Letter from Seller to NewCo 2
 (iii) Completion Documents in Agreed Form
 Deed of Assignment each for IPs, Contracts
 TR1
 Stock Transfer Form
 (iv) An Intra-Group Loan Agreement
 (v) A Bank Loan Agreement
 (vi) A Debenture
o (2) Written resolution for changing name [*Name will be changed to the Seller Company so needs the Seller to change
its name at the same time*]
 Circulated to S/H
Board adjourned
 Signed by a representative of NewCo1 as authorised above
 Board Minutes of Seller Company
o Presents by the Board (includes Mgmt who’s now directors in NewCo1)
o (1) Director resignations
o (2) Documents produced to the Meeting
 (i) Acquisition Agreement to be entered into with NewCo2
 (ii) Disclosure Letter from Seller to NewCo2
 (iii) Completion Documents in Agreed Form (same as above), except where Seller is not a party to that
document
o (3) Written resolution for changing name
 Circulated to S/H
 Signed by a representative of S/H (if corporate) of Seller, accompanied by a board minute evidencing the
appointment of the representative
POST-COMPLETION
1. Tax
 Stamp duty: To be paid on shares by Buyer
 SDLT: To be paid by Buyer on completion of transfer of land
2. Real Property
 TR1: Registration of transfer at the Land Registry
 Notify: Any tenant of the property
3. Companies House
 AP01/AP03: Appointment and resignation of directors
 AD01: Change of registered office
 AA1: Change of accounting reference date
 SH01: Shares Allotment for NewCo1
 NM01: Change of Names
 Written resolutions for change of names, AoA
 New AoA
 Update Registers of Directors, Register of Members
 PSC Register and filings
4. Customer and Supplies
 Dealing with contracts pending for assignment/novation
5. Employees
 Dealing with post-employee matters that pending from DD, proceeding with harmonization process
6. IP
 Register all registrable IP rights
7. Data Protection
 Inform data subject
 TAX IMPLICATION

TAX IMPLICATION IN SHARE SALE

1. Seller’s implication
Corporate Seller Individual Seller
1. Tax implication Corporation tax Chargeable Gain Tax
2. Exemptions SSE N/A
Conditions
 Seller holding at least 10% of ordinary share
 For at least 12 consecutive month in 2y before
disposal
 During such period and immediately after sale,
both Seller and Target are a trading co/members
of such co
Consequences
 Any gain not treated as a chargeable gain
 Any loss would not be allowable loss
N/A ER
Conditions
 Seller holding at least 5% of ordinary share/voting
rights
 For a period of 1y immediately prior to disposal
 Shares in trading co
 Seller is an officer/employee
Consequences
 CGT rate reduced from 20% to 10%, provided the
life time allowance of 10mil still available + claim
made within 1st anniversary of 30 Jan following
the disposal
N/A IR
 Unlikely to be relevant as the shares must be held
from Apr 2016 for the period of 3y
Tax deferral – shares as consideration (‘Rollover’) Tax deferral – shares as consideration
[*Advance clearance can be sought to confirm that Conditions
HMRC are satisfied on this point*]  Same conditions
Conditions Consequences
 Buyer to hold over 25% of Target’s ordinary  Default exemption, unless opt out
shares  Gain to be calculated the same way
 Bona fide commercial reason for structuring the  Buyer loses the benefits of ER/IR
payment in shares – not tax avoidance
Consequence
 Gain to be calculated by the difference between
(i) the base cost of T’s shares and (ii) the proceeds
of consideration shares
Tax deferral – loan note as consideration (‘Holdover’) Tax deferral – loan note as consideration
Conditions (‘Holdover’)
 Buyer to hold over 25% of Target’s ordinary Conditions
shares  Same conditions
 Bona fide commercial reason for structuring the Consequences
payment in shares – not tax avoidance  Default exemption, unless opt out
 Loan notes not redeemable until at least 6m after  Gain to be held in suspense until the loan notes
issue are redeemed/sold
Consequence  Buyer loses the benefits of ER
 Gain to be held in suspense until the loan notes
are redeemed/sold
Pre-sale Dividend Pre-sale Dividend
 Decrease value of Target; less consideration  Subject to income tax
 No corporation tax payable on dividend  Depends tax band of Seller – comparing against
Other considerations chargeable gain tax rate
 Whether Target has sufficient distributable
profits
 Must follow corporate procedure to distribute
dividend – delay the transaction?
 Corporate Seller
3. Unascertainable ‘Earn-out’ (although unusual for Corp. Seller)
consideration At completion
 Tax charged on both (i) sum actually paid on the
sale and (ii) the value of the right to receive
further consideration (Marren v Ingles)
On receiving further consideration
 If the consideration received less than the value
at the completion = capital loss – unlike individual
Seller- NOT possible to carry back
 If the consideration received more than the value
at the completion = capital gain = more tax as SSE
will not apply
4. Retention At completion
Account  The whole consideration subject to tax
Adjustment
 Successful warranty claim = regard as Seller
received less consideration (entitled to claim
overpaid tax); Buter’s base cost reduced
 Successful indemnity claim = if indemnity given
in favour of Buyer, the same adjustment as
warranty can be done (Zim Properties v Proctor)
but no claim on stamp duty
5. Tax point No split exchange – at the time when the contract is
made
Individual Seller
‘Earn-out’
At completion
 Tax charged on both (i) sum actually paid on the
sale and (ii) the value of the right to receive
further consideration (Marren v Ingles)
On receiving further consideration
 If the consideration received less than the value
at the completion = capital loss – possible to
carry back (against general rule)
 If the consideration received more than the value
at the completion = capital gain = more tax as
ER/IR not apply
Same treatment
Same

Split exchange – at the time when the condition is

satisfied

2. Buyer’s Implication
2.1 Buyer’s tax’s liabilities
 Stamp duty at a rate of 0.5%, unless the consideration not exceed 1,000
 VAT – exempt
2.2 Effect of Target’s tax liabilities – Buyer to conduct DD
Issues Concerns Protections
1. Trading losses Benefit to Buyer as can use to set off against future N/A
profit
Conditions
 No major change in nature of trade w/n 3y before
or after the sale; or
 No negligible trade becomes revival following the
sale
2. De-grouping Charge Target leaving the group may result in exit charge  Not concern Buyer in terms of tax
burdens; but increase base cost for
shares
 Concern Seller more as it will be
notionally added to sale price
2. SDLT Clawback SDLT’s liability - Target has received as a result of intra-  Tax indemnity
group transfer and leaves group within 3y of the receipt  Reduction in sale price
3. VAT Group Target to apply for leaving VAT group  If Target remains with VAT group, it
will still be jointly liable with its VAT
group
4. Other tax matters DD against: Tax warranties – no dispute with any tax
 Compliance with tax legislation authority
 Any dispute with tax authority
 Any available losses/reliefs Tax indemnities – when Seller and Buyer
 Group status are aware of specific potential liabilities
 Base costs of capital assets

2.3 Tax’s Issue arising from Funding

 Loan relationship rules
o Costs of borrowings are expense deductible
 Transfer pricing rules (Thin capitalization rule)
 o If the Lender is connected with the Borrower + loan not made on commercial terms, Borrower may not set off some
of the interests

TAX IMPLICATION IN BUSINESS SALE

1. Seller’s Implication (only considered Corporate Seller)
Corporate Seller
1. Tax liability  Corporation tax = Income Profits + Chargeable Gain
 Accountable for VAT, if Buyer fails to satisfy the conditions to waive VAT
Solutions
(i) Consideration is exclusive of VAT
(ii) Buyer’s undertaking to pay VAT when demanded by HMRC
(iii) Buyer’s undertaking to comply with the conditions
2. Assets Sale Income Profits
 Sale of trading stock
 Goodwill and intellectual property created/acquired after 1 Apr 2002
Chargeable Gains
 Land
 Plant
 Machinery
 Goodwill and intellectual property
3. Exemptions/relief Capital Allowance Rules
 Seller will have claimed capital allowances on this item up to completion. If the item is sold for
more than its Tax Written Down Value ('TWDV'), a balancing charge will arise. Seller will wish
to avoid a balancing charge by apportioning a value to this item in the Business Sale Agreement
which is less than its TWDV as that would attract a balancing allowance.
 Buyer will wish the value apportioned to this item to be as high as possible as it will be claiming
new capital allowances on this item following completion. The new capital allowance claimed
by Buyer will be based on the price paid for the item.
 To benefit from Balancing Allowance, Seller and Buyer can agree to make s198 election the
amount of consideration allocated to the fixtures for the purpose of capital allowances rules
o The apportioned amount must not exceed the amount that S spent on the fixtures or
the total sale price of the property to which the fixtures are fixed
 How?
o Such agreement must be notified to HMRC within 2y of the sale
o A notice must include (i) name of Seller and Buyer (ii) amount of consideration
apportioned (iii) identify fixtures and land
Rollover/replacement of business assets
 Deferring tax liability by replacement of business assets
 Conditions:
o S continues to carry on the business or is a part of chargeable gain groups
o Conditions for rollover are satisfied eg. Assets sold are ‘qualifying assets’ eg land,
plant and machinery + w/n 1y before or 3y after than buying a replacement assets
which are qualifying assets
Losses
 Seller trading and capital losses:
(i) Trading losses can be set-off against any kind of income
(ii) Capital losses can be set-off against only capital receipt
 Group trading losses:
(i) Seller co is a member of a tax group for trading losses relief
(ii) Trading losses can be set-off any kind of income in the corresponding accounting period
 Group capital losses:
(i) Seller co is a member of a chargeable gain group
(ii) Capital set-off only chargeable gains
‘Cash Shell’ = when a Passing proceeds to Corporate S/H – less likely to be double tax
selling company sold  Pre-liquidation dividend
the entire business o Dividends are tax-free income
and liquidate  Voluntary liquidation
afterwards o Treated as disposing shares = SSE may apply, provided that those conditions are
satisfied except for the requirement for continuing trade and S/H must have a
controlling interest
Passing proceeds to Individual S/H – more likely to be double tax
 Pre-liquidation dividend
o Dividends are income receipt = subject to income tax
 Voluntary liquidation
o Treated as disposing shares = ER/IR may apply
2. Buyer’s Implication
2.1 Buyer’s tax liability
 VAT on supply of assets
o All assets other than land
 Exception to general rule may apply to the transfer of the whole/part of a business as a going concern
 Conditions
(i) Buyer to use the transferred assets for the same kind of business + no significant break; and
(ii) Buyer must be VAT register
o Land
 General exception on VAT on land/interest in land (ie leases)
 Buyer needs to check whether Sekker has opted to tax (in order to reclaim VAT on expenses) – if it did, Buyer
must make the same election; otherwise VAT would be payable on the consideration apportioned to the
lease
o Practical point: Although the VAT exemption may apply, it’s usual to include VAT clause (ie the consideration is
exclusive of VAT) – in case that the exemption conditions are not satisfied [*Seller Protection*]
 Stamp duty on shares
 SDLT on land
o Payable by Buyer
o SDLT to be charged on the aggregate value of land sold – sliding scale

2.2 Tax’s liability derived from the purchase of assets

 Ordinarily in the asset sale, no tax DD, tax covenant and tax warranties would be required UNLESS one of the assets sold are
‘shares’ in the subsidiaries of the selling company

TAX’S IMPLICATION FOR GROUP COMPANIES

1. Group Relief for Trading Losses
 Criteria
(1) Beneficial ownership test
o Parent beneficially own (directly and indirectly) at least 75% of the ordinary share capital of each subsidiary
o ‘Ordinary share capital’ = all issued shares capital other than those are entitled to a fixed dividend
(2) Economic ownership test
o Beneficially entitled to at least 75% of the profits available and the assets available upon winding-up
 Available relief
o Trading losses of one group co (the Surrendering Company) may be set off against any profits/gains of another group
(the Claimant Company) in a corresponding accounting period
o Whole/partial surrenders
o Claims for relief must be made in the prescribed form within one year of the date of the Claimant Company’s Tax
Return must be filed
o *Claim may be denied* if certain arrangements are in place to transfer the Surrendering Company out of the group
2. Chargeable Gain Group
 Criteria
(1) The 75% subsidiary test
o Principal co holding 75% in sub
o Its subs holding 75% in its sub and so on
(2) The Effective 51% subsidiary test
o Principal co entitled to more than 50% of the subs’ profits or assets
 Available relief
(1) No loss/no gain transfer of capital assets (including IP property created after 1 Apr 2002) within the group
o Tax liabilities differed until the asset sold out of the group
(2) Set-off losses within the group
o Two cos in the same group can jointly elect set off capital losses against another group company’s gain.
o Election must be made within 2y after the end of accounting period
(3) Roll-over relief
 Effect of transfer assets outside the group
o Tax liability – calculated by reference to the base cost of the assets first bought by group member
 Effect of the group company leaving the group within 6y of the receipt of capital assets (‘De-grouping charge’)
o Deemed gain
 Property deemed to be sold and immediately reacquired at the market value on the date of intragroup
transfer. Deemed gain = Proceeds from the deemed sale of land at market value on the date of intragroup
transfer – Base cost at the time when the assets first bought into the group.
o Share sale deal – the deemed gain to be notionally added to the consideration (ie no additional consideration actually
paid) = increase in Seller chargeable gain; not Buyer’s concern
 If SSE applies – doesn’t matter as the whole gain will be entitled to tax relief
 If SSE not apply – consulting tax adviser
 o Base cost of the assets will be market value of the intra group transferred
 Effect of the group company leaving the group within 6y of the receipt of IP assets (intangible regimes)
o Deemed gain
 IP deemed to be realised gain at market value immediately after intra-group transfer and immediately
reacquired it at that value. Deemed gain to be arisen in Target immediately before it leaves the group so it
would be Buyer’s concern.
o Seller may jointly elect with Target (leaving co) to absorb the exit charge
3. Consortium Relief
 Criteria
(1) Two or more corporate S/H hold at least 75% of the consortium company’s ordinary share capital
(2) Each company must own at least 5% of the ordinary share capital
 Available relief
(1) If the consortium company is the Surrendering Company
o Maximum losses available is the relevant fraction multiply by the amount of the consortium company’s loss
(2) If the consortium company is the Claimant Company
o Maximum losses available is the relevant fraction multiply by the amount of the consortium’s profits
 Relevant fraction: the lowest of its shareholding, percentage entitlement to profits and percentage entitlement to assets on a
winding-up

4. Stamp Taxes Group

 Criteria – Same as Group Relief for Trading Losses – ie 75% beneficial ownership test
 Available relief
(1) Stamp duty relief
o Claim by submitting a letter to HMRC stating that: (i) the criteria are satisfied (iii) anti-avoidance provisions not apply
o Anti-avoidance provision – denying the relief
(i) arrangement enable a person (other than a transferor) to have control over the transferee co
(ii) beneficial interest in the assets been transferred by a person outside the stamp tax group
(iii) the transferor and the transferee no longer within the same tax group
(iv) any part of consideration provided by person outside the stamp tax group
(2) SDLT relief
o Claim made within the relevant transactions
o Anti-avoidance provision
(i) arrangement enable a person (other than a transferor) to have control over the transferee co
(ii) the transferor and the transferee no longer within the same tax group
(iii) any part of consideration provided by person outside the stamp tax group
(iv) transfer not made on bona fide commercial reason or the main purpose is to avoid SDLT liability

 Effect of the group company leaving the group within 3y of the transfer
o SDLT clawback arises in T (ie co leaving the group) in share sale deal
o SDLT payable on the market value of the land at the time of intra group transfer

5. VAT group
 Group co can apply to HMRC for group VAT registration, if one company under control (ie majority voting rights or composition
of board) under the others
 Registration to be made in the name of ‘representative member’ – can be any of the group member
 Effect
(1) Representative member only file a single VAT return to HMRC
(2) Pays/reclaims all VAT on behalf of other member
(3) Supplies of goods/services between VAT group cos are disregard for VAT purposes
(4) All members of VAT group are jointly and severally liable to HMRC = when leaving the group, must made application to
remove Target from Seller’s VAT group

TAX AND COMMERCIAL IMPLICATION RELATING TO CONSIDERATION

 Cash
Seller
Commercial  Straightforward; no risk re depreciation in
value
 Earn-out provision/completion account:
(i) Uncertain – open a possibility to get paid
more than all payment on Day 1
(ii) Likely to be subject to set-off
Buyer
 Funding issue – need to obtain loan/issue
shares
 Earn-out provision/completion account:
(i) Uncertain if needs to pay more
(ii) Benefit of set-off clause
 Seller Buyer
Tax - Chargeable gain on cash received - Pre-sale dividend results in less purchase price
- Substantial shareholding exemption (SSE); if but the value of Target will also be decreased
(1) Seller held at least 10% of ordinary shares - No tax deductible benefits
capital in Target
(2) for at least 12 consecutive months in 2y
before completion
(3) both Seller and Target are trading co
/members of a trading group during those 12m
and immediately after the sale
- Pre-sale dividend (if distributable profits are
available as required under s830 CA 2006)
results in lower purchase price and smaller gain
for S to pay tax (only helpful if SSE not
available); for Indv – may be subject to income
tax on pre-sale dividend

 Shares
Seller Buyer
Commercial ADV ADV
- S may benefit from dividends/capital growth - No need to raise cash
- If listed shares, freely marketable + gain - Cheap costs of fund – no obligation to pay
DISADV dividends
- Not liquid – have to sell to realise gain - Lower B’s gearing
- Shares may decrease in value DISADV
- No guarantee of dividends - Share allotment procedure may cause delay
- Result in share dilution; may not pass required
resolution
Tax ADV DISADV
- (only Corp) SSE may be available as above - Dividends paid on shares are not tax deductible
- (only Indi) ER:
(1) hold 5% of shares in Target
(2) Target is a trading co
(3) S is an officer/employee of T
(4) for 12m before the share sale
(5) ER lifetime allowance still available
Result = tax rate reduce from 20% to 10%
- (only Ind) IR
- Pre-sale dividend as above
- (only when SSE not available) Tax deferral until
selling new shares, if:
(1) Buyer hold at least 25% of shares in Target
(2) Bona fide commercial reason to do so
Possible to get HMRC clearance in advance

 Loan notes
Seller Buyer
Commercial ADV ADV
- Right to receive interest on loan notes - Cash flow benefits: no need to raise cash all at
DISADV once
- Not liquid (cash-flow disadvantage) - Can have set-off clause against
- Risky - If Buyer insolvent, Seller may not get paid warranties/indemnities claim
in full (mitigate by security/guarantee) DISADV
- Set-off operates against Seller - Needs to pay interests regardless of
profitability
Tax - SSE may be available as above - Interests paid on loan is tax deductible
- Pre-sale dividend as above
- (only when SSE not available) Tax deferral until
redeeming the loan notes, if:
(1) Buyer hold at least 25% of shares in Target
(2) Bona fide commercial reason to do so
(3) not redeemable until at least 6m after issue
Possible to get HMRC clearance in advance
 Earn-out
Seller Buyer
Commercial ADV ADV
- Extra pay per profits - No cash payout on the completion
DISADV - Appealing if Seller is Indv who will continue
- Uncertainty working after acquisition
- Not appealing to Corp Seller or Indv Seller who - Can have set-off clause against
not going to work after transaction warranties/indemnities claim

Tax ADV
- SSE may be available as above
- Pre-sale dividend as above
DISADV
- Tax on the right to earn-out on the completion