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A Guide to Mergers and Acquisitions in the UK
September 2015
Simon Chapman
Burgis & Bullock Corporate Finance
2 Chapel Cou...
A GUIDE TO MERGERS AND ACQUISITIONS IN THE UK
Burgis & Bullock Corporate Finance 1
About the author
Simon Chapman is a cor...
A GUIDE TO MERGERS AND ACQUISITIONS IN THE UK
Burgis & Bullock Corporate Finance 1
Contents
Page
1. Introduction ............
INTRODUCTION
Burgis & Bullock Corporate Finance 2
1. Introduction
INTRODUCTION
Burgis & Bullock Corporate Finance 3
The UK is a highly attractive place to do business as evidenced by the l...
DEAL ACTIVITY IN THE UK
Burgis & Bullock Corporate Finance 4
2. Deal activity in the UK
DEAL ACTIVITY IN THE UK
Burgis & Bullock Corporate Finance 5
In 2014/15, there were 190 deals involving a UK target compan...
DEAL ACTIVITY IN THE UK
Burgis & Bullock Corporate Finance 6
 Strength in key industries such as financial and profession...
LEGAL AND REGULATORY FRAMEWORK
Burgis & Bullock Corporate Finance 7
3. Legal and regulatory framework
LEGAL AND REGULATORY FRAMEWORK
Burgis & Bullock Corporate Finance 8
3.1. Overview
The “Doing Business in the UK” guides pr...
LEGAL AND REGULATORY FRAMEWORK
Burgis & Bullock Corporate Finance 9
3.3.4. Other regulatory consents
There are certain ind...
FINDING AND RESEARCHING TARGETS
Burgis & Bullock Corporate Finance 10
4. Finding and researching targets
FINDING AND RESEARCHING TARGETS
Burgis & Bullock Corporate Finance 11
4.1. Acquisition strategy
The decision to make an ac...
FINDING AND RESEARCHING TARGETS
Burgis & Bullock Corporate Finance 12
also be obtained directly via the Companies House we...
FINDING AND RESEARCHING TARGETS
Burgis & Bullock Corporate Finance 13
Banks may be a similar source of information, but ge...
PUBLIC M&A
Burgis & Bullock Corporate Finance 14
5. Public M&A
PUBLIC M&A
Burgis & Bullock Corporate Finance 15
5.1. Regulatory overview
The acquisition of certain companies in the UK i...
PUBLIC M&A
Burgis & Bullock Corporate Finance 16
Aspect Offer Scheme of arrangement
Acceptance Minimum acceptance conditio...
PUBLIC M&A
Burgis & Bullock Corporate Finance 17
The detailed rules cover a range of topics, including secrecy and announc...
PUBLIC M&A
Burgis & Bullock Corporate Finance 18
5.4.3. Financing
Committed funding must be in place at the time a firm in...
PUBLIC M&A
Burgis & Bullock Corporate Finance 19
5.4.7. Stake building
Care must be taken by a bidder when acquiring share...
PUBLIC M&A
Burgis & Bullock Corporate Finance 20
5.4.10. Offer Document
The offer document must normally be sent to the sh...
PUBLIC M&A
Burgis & Bullock Corporate Finance 21
Non-UK listed offerors should disclose the same level of information as f...
PUBLIC M&A
Burgis & Bullock Corporate Finance 22
5.4.12. Offer timetable
The timetable for a public M&A transaction will d...
PUBLIC M&A
Burgis & Bullock Corporate Finance 23
5.4.13. Information
The Code sets out certain standards for the quality o...
PUBLIC M&A
Burgis & Bullock Corporate Finance 24
5.7. Difference between public and private M&A
As noted in the following ...
PRIVATE M&A
Burgis & Bullock Corporate Finance 25
6. Private M&A
PRIVATE M&A
Burgis & Bullock Corporate Finance 26
6.1. Overview
Unlike public M&A, participants in transactions not subjec...
PRIVATE M&A
Burgis & Bullock Corporate Finance 27
Share purchase Asset purchase
Relationships with customers and suppliers...
PRIVATE M&A
Burgis & Bullock Corporate Finance 28
 Sale of a business at a loss to the vendor where the seller has the ab...
PRIVATE M&A
Burgis & Bullock Corporate Finance 29
experienced financial adviser can add significant value by helping to id...
PRIVATE M&A
Burgis & Bullock Corporate Finance 30
6.3.2. Auction sale process
While each sale process is different, in bro...
PRIVATE M&A
Burgis & Bullock Corporate Finance 31
provision of a timetable to bidders and a requirement to provide initial...
PRIVATE M&A
Burgis & Bullock Corporate Finance 32
The administration will be managed by a licensed Insolvency Practitioner...
PRIVATE M&A
Burgis & Bullock Corporate Finance 33
6.4. Confidentiality agreements
Regardless of the type of sales process ...
PRIVATE M&A
Burgis & Bullock Corporate Finance 34
 Structure of the consideration (cash, shares, loans etc.) and when it ...
PRIVATE M&A
Burgis & Bullock Corporate Finance 35
6.8. Consideration structure
In private company sales the buyer and sell...
PRIVATE M&A
Burgis & Bullock Corporate Finance 36
6.10. Due diligence
As mentioned in section 3, English law rarely implie...
PRIVATE M&A
Burgis & Bullock Corporate Finance 37
While vendor due diligence reports contain useful factual information fo...
PRIVATE M&A
Burgis & Bullock Corporate Finance 38
 Actuarial/pension review: where the target company is a participating ...
PRIVATE M&A
Burgis & Bullock Corporate Finance 39
premium to enter a new market will expect a full set of warranties from ...
PRIVATE M&A
Burgis & Bullock Corporate Finance 40
The purchase agreement should state who is responsible for preparing the...
PRIVATE M&A
Burgis & Bullock Corporate Finance 41
As tax legislation is constantly changing it is important to obtain prof...
FINANCING THE ACQUISITION
Burgis & Bullock Corporate Finance 42
7. Financing the acquisition
FINANCING THE ACQUISITION
Burgis & Bullock Corporate Finance 43
7.1. Funding sources
Where an overseas acquirer needs to r...
FINANCING THE ACQUISITION
Burgis & Bullock Corporate Finance 44
For small and mid-market transactions the process for secu...
FINANCING THE ACQUISITION
Burgis & Bullock Corporate Finance 45
7.6. Private equity funds
The UK has a large and well deve...
COMMON DEAL ISSUES IN THE UK
Burgis & Bullock Corporate Finance 46
8. Common deal issues in the UK
COMMON DEAL ISSUES IN THE UK
Burgis & Bullock Corporate Finance 47
8.1. Overview
The UK is generally an open country in wh...
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
Burgis & Bullock - Guide to Mergers and Acquisitions in the UK
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Burgis & Bullock - Guide to Mergers and Acquisitions in the UK

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The UK is a highly attractive place to do business as evidenced by the large levels of inward investment into the country seen over the last few years. For overseas companies wishing to set up operations and trade there are a number of highly useful guides to doing business in the UK produced by the accounting and law firm members of the TAG Alliances (www.tiagnet.com and www.taglaw.com).

However, one of the most common methods for international companies to seek a presence in the UK is through acquisition. Having advised and supported overseas businesses to acquire UK companies we have observed there are many subtle, and not so subtle, variations in how different countries conduct M&A activity. This includes not just the obvious legal differences, but also variances in style, custom, market practice, the role of advisers, and the process undertaken.

This guide does not cover the strategic and commercial aspects of an effective acquisition strategy that would be common across the globe, such as defining your acquisition criteria, target analysis, valuations, negotiations, and post-acquisition integration. The document is designed to provide non-UK acquirers with an overview of the legal and regulatory regime governing M&A activity in the UK together with an understanding of the processes and transaction issues that are most commonly encountered in this country. It is no substitute for good quality professional advice, but should help buyers to plan their M&A strategy for maximum effectiveness.

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Burgis & Bullock - Guide to Mergers and Acquisitions in the UK

  1. 1. A Guide to Mergers and Acquisitions in the UK September 2015 Simon Chapman Burgis & Bullock Corporate Finance 2 Chapel Court Holly Walk Leamington Spa CV32 4YS United Kingdom www.burgisbullock.com
  2. 2. A GUIDE TO MERGERS AND ACQUISITIONS IN THE UK Burgis & Bullock Corporate Finance 1 About the author Simon Chapman is a corporate finance partner with Burgis & Bullock, specialising in M&A transactions and valuations. A graduate of the University of Oxford, he qualified as a chartered accountant with Coopers & Lybrand and subsequently spent seven years in the corporate finance department of Ernst & Young. Simon was a partner at Baker Tilly where he headed the firm’s Birmingham M&A team before joining Burgis & Bullock in 2010. Simon has advised on many international transactions, including a £46m buy-out jointly funded by a UK private equity house and French industrial group, the acquisition of a UK building products company by a US acquirer, and the management buy-out of an industrial services group with subsidiaries in six countries from a US listed parent. He holds the Corporate Finance Qualification of the Institute of Chartered Accountants in England & Wales and is a member of the Institute’s panel of valuation experts. About Burgis & Bullock Corporate Finance Burgis & Bullock Corporate Finance is an award winning M&A firm specialising in the provision of the highest levels of expertise, hands-on transaction support, and leading edge corporate finance solutions to owner-managed businesses. We provide strategic advice and practical support for:  Company sales  Acquisitions  Management buy-outs and buy-ins  Equity and debt finance raising  Valuations The firm is part of the Burgis & Bullock Group, a member firm of the TAG Alliances, which is ranked as one of the top three independent professional services associations in the world. Through TAG we have a global footprint of 592 offices in 101 countries which enables us to provide a seamless infrastructure for cross-border deals.
  3. 3. A GUIDE TO MERGERS AND ACQUISITIONS IN THE UK Burgis & Bullock Corporate Finance 1 Contents Page 1. Introduction ................................................................................................................. 2 2. Deal activity in the UK................................................................................................. 4 3. Legal and regulatory framework ................................................................................. 7 4. Finding and researching targets ............................................................................... 10 5. Public M&A ............................................................................................................... 14 6. Private M&A .............................................................................................................. 25 7. Financing the acquisition .......................................................................................... 42 8. Common deal issues in the UK ................................................................................ 46 9. Tax considerations for overseas buyers ................................................................... 51 10. Advisers .................................................................................................................... 55 Appendix A: Companies legislation .................................................................................. 58 Appendix B: EU merger regulation thresholds ................................................................. 60 Glossary............................................................................................................................ 61
  4. 4. INTRODUCTION Burgis & Bullock Corporate Finance 2 1. Introduction
  5. 5. INTRODUCTION Burgis & Bullock Corporate Finance 3 The UK is a highly attractive place to do business as evidenced by the large levels of inward investment into the country seen over the last few years. For overseas companies wishing to set up operations and trade there are a number of highly useful guides to doing business in the UK produced by the accounting and law firm members of the TAG Alliances (www.tiagnet.com and www.taglaw.com). However, one of the most common methods for international companies to seek a presence in the UK is through acquisition. Having advised and supported overseas businesses to acquire UK companies we have observed there are many subtle, and not so subtle, variations in how different countries conduct M&A activity. This includes not just the obvious legal differences, but also variances in style, custom, market practice, the role of advisers, and the process undertaken. This guide does not cover the strategic and commercial aspects of an effective acquisition strategy that would be common across the globe, such as defining your acquisition criteria, target analysis, valuations, negotiations, and post-acquisition integration. The document is designed to provide non-UK acquirers with an overview of the legal and regulatory regime governing M&A activity in the UK together with an understanding of the processes and transaction issues that are most commonly encountered in this country. It is no substitute for good quality professional advice, but should help buyers to plan their M&A strategy for maximum effectiveness.
  6. 6. DEAL ACTIVITY IN THE UK Burgis & Bullock Corporate Finance 4 2. Deal activity in the UK
  7. 7. DEAL ACTIVITY IN THE UK Burgis & Bullock Corporate Finance 5 In 2014/15, there were 190 deals involving a UK target company and an overseas acquirer (“Inward Investment Report 2014/15” by UK Trade & Investment). Purely domestic deals represent a minority of UK transaction activity by both volume and value, and cross-border M&A now accounts for nearly 80% of the value of all UK deal activity. The UK is the leading target jurisdiction in Europe for cross-border M&A activity, and for foreign direct investment in general. In particular, the UK is a key market for US buyers who make up nearly 40% of the overseas acquirers of UK companies (source: Office for National Statistics). While there are a wide range of factors that drive individual deals and buyers, a number of common themes emerge when asking why overseas companies choose to make acquisitions in the UK:  Stable political regime.  Well established rule of law, contract, and property rights.  Favourable business regulatory environment with few restrictions on foreign ownership.  Low levels of corporate taxation.  Flexible labour market.  Advanced economy and educated workforce. Domestic 22% Inbound 34% Outbound 44% M&A deal mix by value Domestic 44% Inbound 26% Outbound 30% M&A deal mix by volume USA 37% Other Americas 8% European Union 28% Other European 14% Rest of World 13% Origin of overseas acquirers
  8. 8. DEAL ACTIVITY IN THE UK Burgis & Bullock Corporate Finance 6  Strength in key industries such as financial and professional services, creative industries, aerospace, automotive, information technology, life sciences, and energy.  Large and diverse range of owner-managed businesses, many of which trade internationally.  Access to the wider European Union (“EU”) market, but outside the Eurozone. Specifically, the UK is an open market in terms of overseas companies wishing to acquire trading businesses. Other than for protecting competition and certain strategic companies or industries, there are no restrictions on overseas companies making acquisitions in the UK. In the listed company arena there is a well-established and effective mechanism for ensuring the orderly conduct of takeover bids and in the private sphere parties are largely free to contract on whatever terms they wish. Supporting the M&A market is a diverse range of funders and advisers. These factors make the UK an attractive destination for global corporate acquirers.
  9. 9. LEGAL AND REGULATORY FRAMEWORK Burgis & Bullock Corporate Finance 7 3. Legal and regulatory framework
  10. 10. LEGAL AND REGULATORY FRAMEWORK Burgis & Bullock Corporate Finance 8 3.1. Overview The “Doing Business in the UK” guides produced by UK TIAG and TAGLaw members provide a good overview of the general legal and regulatory regime covering the establishment and operation of businesses in the UK. In this section we specifically focus on the regulations affecting the purchase and sale of businesses. It should be noted that each of England and Wales, Scotland, and Northern Ireland is a separate jurisdiction for legal purposes in the UK. While in many respects covered in this section the relevant laws and regulations are the same for all territories, in some areas (such as property and litigation) the relevant laws can vary significantly. This guide focuses on the laws of England and Wales. If you are considering an acquisition in Scotland or Northern Ireland we would be happy to refer you to an appropriate adviser. 3.2. Companies legislation English law is often favoured by buyers and sellers even for deals with limited connection to the UK. While there are some legislative provisions and principles of case law that affect what can be included in contracts, essentially under English law the parties are free to contract on whatever terms they choose. There are very limited areas where English law principles will override the terms expressed in a contract, and terms are rarely implied into a contract by law or the courts. The four main statutes that affect acquisitions in the UK are the Companies Act 2006, the Financial Services and Markets Act 2000, the Financial Services Act 2012, and the Criminal Justice Act 1993. In addition, the Companies (Cross-Border) Mergers Regulations 2007 implements the EU Merger Directive 2006/56/EG in UK law. The main legal provisions relating to M&A transactions are summarised in Appendix A. 3.3. Regulatory bodies Acquisitions in the UK are regulated by a number of different authorities deriving power from several sources. 3.3.1. The Panel on Takeovers and Mergers The Panel on Takeovers and Mergers (“the Panel”) regulates takeovers of companies that are subject to the City Code on Takeovers and Mergers (“the Code”), which principally covers companies that have shares listed on a stock exchange or that are traded publicly (see section 5). 3.3.2. Competition and Markets Authority This body investigates mergers that may restrict competition and possible breaches of UK or European competition regulations. In certain cases, the European Commission has exclusive jurisdiction to review competition issues resulting from proposed takeovers. 3.3.3. Financial Conduct Authority and Prudential Regulation Authority For transactions involving financial services firms, the UK’s statutory financial regulators may become involved. These are the Financial Conduct Authority (“FCA”) which is responsible for regulating financial services firms and parts of the companies’ legislation, and the Prudential Regulation Authority (“PRA”) which is specifically responsible for the supervision of banks and insurers.
  11. 11. LEGAL AND REGULATORY FRAMEWORK Burgis & Bullock Corporate Finance 9 3.3.4. Other regulatory consents There are certain industries in the UK where specific regulatory consents (including from Government departments) may be required, for example, newspapers, television, radio, utilities, and financial services. Certain other regulatory and government bodies may become involved in a transaction depending upon its specific characteristics, such as The Pensions Regulator and HM Revenue & Customs (“HMRC”). 3.4. Competition legislation UK competition laws are set out in the Competition Act 1998, the Enterprise Act 2002 and the Enterprise and Regulatory Reform Act 2013. The Competition and Markets Authority (“CMA”) is the relevant regulatory body for competition matters in the UK. The CMA may initiate an investigation (phase 1 investigation) if a proposed takeover creates a qualifying situation for investigation, other than where the European Commission has exclusive jurisdiction. The CMA is under a duty to refer a takeover for a detailed phase 2 investigation if there is a relevant merger which has or may result in a lessening of competition. A takeover qualifies for investigation if there is a coming together of two previously distinct enterprises and either:  the UK turnover of the target exceeds £70 million per annum; or  as a result of the merger a 25% share of the supply of goods or services in a particular market is created or enhanced in the UK. There is no statutory obligation to notify the CMA of an acquisition that qualifies for reference, but in practice most such takeovers are referred to the CMA by the participants. Where the merger is notified, the CMA has 40 days to decide whether to clear the takeover or refer it for a detailed investigation. If a merger is not notified to the CMA, then this body has a period of four months from the date of closing (or the date the transaction becomes public knowledge if later) in which to initiate an investigation. In order to secure clearance from the CMA, the parties to a transaction may provide certain undertakings, such as the divestment of parts of the enlarged business. For mergers that have been subject to a detailed investigation, the CMA may:  clear the takeover;  prohibit it and force the parties to unwind any completed arrangements; or  approve the transaction subject to certain remedies, such as divestment of parts of the enlarged business. The European Commission has exclusive jurisdiction to review competition issues arising from takeovers that are “concentrations with a Community dimension”. Whether this test is met depends on the takeover reaching certain turnover thresholds, which are set out in diagrammatic form in Appendix B. Overseas buyers should note that for transactions where EU merger regulation applies, closing before clearance is secured is prohibited.
  12. 12. FINDING AND RESEARCHING TARGETS Burgis & Bullock Corporate Finance 10 4. Finding and researching targets
  13. 13. FINDING AND RESEARCHING TARGETS Burgis & Bullock Corporate Finance 11 4.1. Acquisition strategy The decision to make an acquisition may be strategic or tactical and driven by one or more factors, such as:  Acquiring new products and services to take into wider markets.  Gaining new technologies, processes, know-how, and skilled personnel.  Securing access to new customers, markets, and industry sectors.  Geographical expansion, notably into the EU.  Securing manufacturing or distribution facilities closer to end markets.  Gaining control of supply sources or forward integration into higher added value products.  Deploying surplus funds. Where the prospective acquirer has not already identified a target company it is necessary to research the population of possible UK businesses in order to identify a company matching the relevant acquisition criteria. Fortunately for acquirers, there is a large volume of publicly available information on many UK businesses which can be used to quickly screen potential targets. 4.2. UK Government The UK Government actively encourages investment in the country, particularly in the development of greenfield sites that will create new jobs. The principal body that supports inward investment into the UK is UK Trade and Investment and further information can be found on their website: www.gov.uk/ukti The Government primarily encourages investment by creating a favourable business regime through de-regulation and low corporate taxes and by providing advice and contacts to investors. Direct subsidies to secure investment from overseas companies are rare but do happen in certain strategic industries. 4.3. Companies House All companies, whether listed or privately owned, are required to file information at the UK’s company registry which can then be freely accessed. This information includes the following:  Annual accounts, which for all but very small companies will include full profit and loss accounts, balance sheets, and cash flows and comprehensive notes.  Annual return containing details of directors, shareholders, and the share capital structure.  Articles of Association, which is the company’s constitution and sets out directors’ powers and responsibilities, the rights of each class of shares including dividends, the mechanism for dealing with share transfers, and procedures for shareholder meetings.  Details of all legal charges such as mortgages.  Information on certain share transactions, including company share buy-backs. Your financial or legal adviser should have registered access to Companies House and will be able to provide filed documents on target companies. However, information can
  14. 14. FINDING AND RESEARCHING TARGETS Burgis & Bullock Corporate Finance 12 also be obtained directly via the Companies House website: https://www.gov.uk/government/organisations/companies-house 4.4. Company databases There are a number of subscription databases that obtain information from Companies House and other sources, including FAME operated by Bureau van Dijk and Experian’s MarketIQ. Owing to the high level of disclosure required from all UK companies these databases generally provide good levels of functionality for carrying out searches by industry, region, size of business, type of owner etc. A good M&A adviser or accountant should have access to one or more of these databases to assist you in your UK acquisition search. 4.5. M&A advisers and professional networks A good M&A adviser can assist an overseas acquirer in undertaking a large amount of the research work by identifying and analysing potential targets and locating non-public information about companies that may be of interest. The adviser may have a particular knowledge about an industry sector or will almost certainly be able to identify a person or firm with insights into the market sector that is of interest to an acquirer. In addition, the M&A adviser may know and be able to speak informally with the target company’s financial or legal adviser to get an indication for whether an approach might be welcomed by the target company and how best it should be made. After an acquirer’s own in-house team, M&A advisers and accountancy firms are considered the most important source of intelligence on potential cross-border M&A targets (“Cross Border M&A: Perspectives on a changing world”, Clifford Chance). 4.6. Trade bodies and directories Many UK companies are members of an industry or trade body that seeks to promote that industry, lobby government, and provide information to its members. Their websites usually contain a large amount of valuable information, including membership directories, research reports, and industry news. The UK has several major international conference venues including Olympia in London and the National Exhibition Centre in Birmingham. These locations are frequently used for national and international industry fairs and exhibitions, which provides an excellent opportunity for gathering market intelligence. 4.7. Private equity portfolios The one certain thing about private equity backed companies is that they are all for sale. While opening a dialogue with the owner of a private company can sometimes be challenging, private equity executives are generally much more open to discuss M&A opportunities. As deal values are often publicised, or can be calculated from publicly filed information, it is also possible to estimate the likely price range that will give the private equity its target return. Approaching private equity firms through a UK adviser is often more productive than a direct formal approach by the buyer to either the house or investee company. The adviser may well know the investment executives personally and should be able to extract useful information through an “informal” dialogue.
  15. 15. FINDING AND RESEARCHING TARGETS Burgis & Bullock Corporate Finance 13 Banks may be a similar source of information, but generally they are not as close to their clients as private equity firms are generally reluctant to engage too openly with third parties. 4.8. Business for sale listings There are a number of online and hard copy business for sale listings that advertise companies for sale. However, these are most frequently small businesses being sold by brokers and transfer agents and so relying on such sources is unlikely to support an effective acquisition strategy.
  16. 16. PUBLIC M&A Burgis & Bullock Corporate Finance 14 5. Public M&A
  17. 17. PUBLIC M&A Burgis & Bullock Corporate Finance 15 5.1. Regulatory overview The acquisition of certain companies in the UK is governed by the City Code on Takeovers and Mergers (“the Code”) and overseen by The Panel on Takeovers and Mergers (“the Panel”). The Code is most commonly applied in the acquisition of companies whose shares are quoted on a stock exchange, such as the London Stock Exchange and the Alternative Investment Market (“AiM”), or on a trading facility. However, the Code also applies to other companies, notably:  All public limited companies (whether quoted or not).  Companies whose shares have been publicly traded or prices quoted within the last 10 years (even if the company is not currently listed on a stock exchange)  Companies that have filed a prospectus for the offer, admission to trading, or issue of securities. For small companies and low value transactions, compliance with the Code may result in a disproportionate level of transaction fees. In certain limited circumstances it may be possible for the target company to obtain a waiver from the requirement to comply with the Code. 5.2. Transaction structure In the UK, an acquisition of a listed company is normally undertaken in one of two ways – an offer or scheme of arrangement. Which method is selected will depend on the particular circumstances of the bid, for example, whether it is hostile or the likelihood of a significant dissenting minority. A contractual offer is similar to a US tender offer under which the bidder makes an offer to the target company’s shareholders who choose whether or not to accept. The offer will be subject to a number of conditions, notably an “acceptance condition”. If the bidder secures 50% of the shares they can secure control and complete the transaction. However, typically the acceptance condition will be set at 90% because at this level the bidder can then compulsorily acquire the remaining shares. A scheme of arrangement is a court approved process which is under the control of the target company’s board and is governed by sections 895 to 901 of the Companies Act 2006. Accordingly, it is unlikely to be appropriate for hostile bids. The scheme must be approved by 75% in value of the target company’s shareholders who vote and then sanctioned by the court. Once sanctioned and registered at Companies House the scheme binds all shareholders and the bidder secures 100% ownership of the target company. Therefore, this method may be appropriate if a bidder is not certain of achieving the 90% acceptance level of an offer but can secure the support of 75% of the target company’s shareholders. The principal differences between an offer and scheme of arrangement are set out in the table on the following page.
  18. 18. PUBLIC M&A Burgis & Bullock Corporate Finance 16 Aspect Offer Scheme of arrangement Acceptance Minimum acceptance condition of 50%. Shareholders wishing to block need 50%. Requires 75% by value of voting shareholders plus court sanction. Lower threshold needed by dissenting shareholders to block the scheme compared with an offer. Achieving 100% Require 90% acceptances to compulsorily acquire remaining shares. Once passed, the scheme binds all shareholders; no minority shareholders remain. Timetable Code timetable applies. Code timetable subject to court hearing dates. Can be quicker than an offer to achieve 100% with greater certainty on timetable. Hostile bids/ competing situations Bidder controls process and greater flexibility in competitive situation. Target board controls process; less flexible in competing situation; bidder cannot proceed unilaterally. Overseas jurisdictions May be necessary to publish locally compliant offer documents in multiple jurisdictions. Possible exemption from overseas takeover offer rules and securities law implications. 5.3. The Panel The Panel’s role is to ensure that the Code is adhered to on transactions to which it applies. The Panel is not interested in the financial or commercial advantages or disadvantages of a transaction and wider public interest issues, such as competition policy, are the responsibility of other regulatory bodies. It has an active, hands-on role in regulating bids to ensure fair treatment for shareholders and that takeovers are conducted within an orderly framework. As a result, there is very little court intervention or tactical litigation in public M&A in the UK. The Panel should be consulted at an early stage in relation to any transactions which might be subject to the Code. 5.4. The Code The Code is based on a set of six General Principles underpinned by 38 detailed rules.  Equivalent treatment of target shareholders of the same class; and protection of other shareholders when a person acquires control of a company.  Sufficient time and information for target shareholders to decide on a bid.  The target company’s board of directors must act in the interests of the company as a whole and must not deny shareholders the opportunity to decide on the merits of a bid.  A false market in the target company’s shares must not be created.  Bidder must announce an offer only after ensuring it can fulfil in full any cash consideration and after taking all reasonable measures to secure implementation of any other consideration.  The target company must not be subject to a prolonged siege.
  19. 19. PUBLIC M&A Burgis & Bullock Corporate Finance 17 The detailed rules cover a range of topics, including secrecy and announcements, conduct of boards and independent advice, dealing in shares, the content of offer documents, provision of information, the use of profit forecasts, and the offer timetable. A brief review of some of the main rules that are relevant to acquirers is set out below. 5.4.1. Secrecy and announcements Secrecy must be maintained before any offer is launched, which would normally include a restriction on the number of parties involved, maintenance of an “insider list”, and use of code names. Any leak may force an early announcement which would then trigger an obligation on the bidder to make an offer within a prescribed timescale or withdraw. A bidder is obliged to make an announcement regarding their bid intentions in the following circumstances:  Rumour, speculation, or untoward movement in the target’s share price and there are reasonable grounds for concluding the bidder’s conduct led to the situation.  If knowledge about a possible offer is about to extend beyond those who need to know in the parties and their advisers.  When a firm intention to make an offer is notified to the target.  On the acquisition of an interest in the target company (30% shareholding) which triggers an obligation to make a mandatory offer. The target company must make an announcement in the following instances:  If, after an approach by a bidder, target is the subject of rumour or an untoward movement in its share price.  If target is seeking one or more potential bidders and is the subject of rumour or an untoward movement in its share price, or the number of potential bidders is about to exceed a very restricted number. Target and bidder may choose to make an announcement about an offer at any time. Generally, before the board of the target company is approached the potential offeror is responsible for making any announcement and following any approach it is the responsibility of the target company. The announcement of an offer signals the formal commencement of the offer process under the Code. An offeror must notify a firm intention to make an offer to the board of a target company or its advisers before making a public announcement. 5.4.2. Put up or shut up A potential bidder has 28 days after it is first publicly identified in a possible offer announcement to make a formal offer. If it fails to make a firm offer it will be unable to launch another bid for the target for six months unless:  the Panel agrees to an extension at the request of the target;  a competing bidder announces a firm intention to make an offer; or  if the potential bidder is participating in a formal sale process started by the target.
  20. 20. PUBLIC M&A Burgis & Bullock Corporate Finance 18 5.4.3. Financing Committed funding must be in place at the time a firm intention to make an offer is announced. Financing conditions are generally not permitted in offers under the Code. The bidder’s financial adviser must publicly confirm that the bidder has the cash resources to acquire all the target company’s shares where a cash offer is made. 5.4.4. Due diligence All due diligence must be undertaken before a firm offer announcement and there can be no due diligence condition in the offer. There is no obligation on the target company to provide information to the bidder for the purposes of due diligence. However, any information that is provided to one bidder must be provided to all competing bidders. Given this Code requirement, the level of due diligence that a target permits is usually much more restricted than for a private company sale. 5.4.5. Deal protection There is only very limited deal protection available to a bidder in public M&A in the UK. There is a general ban on offer-related arrangements between parties, which would include a prohibition on the following:  Most break fees payable by target.  Implementation agreements.  Exclusivity and non-solicitation agreements. However, the restrictions on deal protection do not prohibit the following:  Irrevocable undertakings and letters of intent from shareholders.  Standard confidentiality undertakings.  Reverse break fee.  Subject to Panel approval, break fee payable to a successful bidder within a formal sales process initiated by the target.  Stake building (subject to the other rules of the Code).  Other arrangements imposing obligations on the bidder only. 5.4.6. Special deals There is a general ban on a bidder entering into special deals with select shareholders which applies when an offer is reasonably in contemplation and during the offer period. This would cover a wide range of deals, for example, a promise to make good to a seller of a target company’s shares the difference between the sale price and the price of a subsequent successful offer. Where the bidder plans to put in place incentivisation arrangements for target management these may need to be disclosed and a fairness opinion obtained from the target’s financial adviser. Where the management arrangements are unusual or significant the Panel should be consulted and it may require additional conditions to be met, such as approval from the target company’s shareholders.
  21. 21. PUBLIC M&A Burgis & Bullock Corporate Finance 19 5.4.7. Stake building Care must be taken by a bidder when acquiring shares in a target company prior launching a formal bid because the price paid for those shares will affect the pricing of any subsequent offer. When a bidder or connected group (“concert party”) acquires interests in shares carrying 30% or more of the voting rights of the target company they must make a cash offer (“mandatory offer”) to all other shareholders at the highest price paid in the 12 months before the offer was announced. When interests in shares carrying 10% or more of the voting rights of a class have been acquired by a bidder in the offer period and the previous 12 months, the offer must include a cash alternative for all shareholders of that class at the highest price paid by the bidder in that period. If the bidder acquires shares in the target company at a price higher than the value of the offer, the offer to all shareholders must be increased accordingly. Bidders should also have consideration to other laws and regulations when stake building, notably:  insider dealing and market abuse; and  requirement to publicly disclose significant shareholdings in listed companies and dealings during an offer period. 5.4.8. Irrevocable undertakings Before a bid is announced an offeror will usually seek irrevocable undertakings from key shareholders (primarily institutions but in some cases major individual shareholders) and target management that they will accept the offer. Irrevocable undertakings can be legally binding in all circumstances or may cease to apply in the event of a higher offer from another party. 5.4.9. Conditions and pre-conditions The Code permits an offeror to include conditions or pre-conditions that need to be satisfied in order for the offer to proceed. A pre-condition is a condition that must be satisfied or waived before an offer is formally made by sending the offer document. Pre- conditions are usually restricted to competition or other regulatory clearances. A condition applies when the offer has been formally made and relates to the closing of the offer. Conditions and pre-conditions should not usually depend solely on the subjective judgements of the directors of the offeror or target. The Code restricts the ability of an offeror to invoke non-compliance with conditions to those matters that are of material significance. In particular, for an offeror to invoke a “no material adverse change” condition and withdraw its offer it must demonstrate circumstances that are entirely exceptional in nature that could not have been reasonably foreseen.
  22. 22. PUBLIC M&A Burgis & Bullock Corporate Finance 20 5.4.10. Offer Document The offer document must normally be sent to the shareholders of the target company within 28 days of the announcement of a firm intention to make an offer. Where a scheme of arrangement is used, the scheme circular takes the place of the offer document. The offer document will normally include a letter from the offeror setting out the offer and, where the offer is recommended, a letter from the chairman of the target company. The offer must set out the following:  Details of the offeror and any parties acting in concert.  Terms of the offer for each class of security including the consideration and how this is to be discharged.  All conditions to which the offer is subject and break fees payable.  Procedures for accepting the offer (or voting under a scheme of arrangement).  Details of the share price history of the offeree.  Details of all irrevocable undertakings.  Details of any securities offered as consideration, including arrangements for any trading facility.  Disclosure of relevant share dealings and shareholdings in the target company.  How the offer is to be financed and cash confirmation from the offeror’s adviser.  Fees and expenses to be incurred by the offeror in connection with the offer. In addition, the Code sets out certain information relating to the offeror’s intentions regarding the target company that must be included in the document as follows:  Long-term commercial justification of the offer and intentions regarding the future of the target business.  Intentions regarding employees and the management of the target company and its subsidiaries, conditions of employment, and any existing pension schemes.  Strategic plans for the target business and likely impact on employment and location of business.  Plans for the redeployment of fixed assets.  Maintenance of any trading facility for the securities of the target company.  Details of any post-offer undertakings given by the offeror. Where the offeror is a UK company that is listed on a regulated market, AiM or ISDX, the following information must be disclosed:  Names of directors.  Nature of its business and its financial and trading prospects, including trading since the last published results where there is a securities offer.  Website address where relevant financial information can be obtained.  A statement of the effect of the full acceptance of the offer on the offeror’s earnings and assets and liabilities.  Summary of material contracts entered into otherwise than in the normal course of business during the previous two years.
  23. 23. PUBLIC M&A Burgis & Bullock Corporate Finance 21 Non-UK listed offerors should disclose the same level of information as for a UK listed company to the extent possible. In addition, information relating to shareholders owning more than 5% of the share capital of the offeror and parties who will acquire or increase their shareholding in the offeror must be disclosed. The offer document should also contain details of public ratings accorded to offeror and offeree and details of any changes to those ratings and outlooks during the offer period. Where a profit forecast is included, the offeror must state the bases of the forecast and include statements from its reporting accountants and financial adviser confirming the forecasts have been carefully and properly compiled. Within 14 days of the publication of the offer document the target company board must publish its response to the offer, including the advice of its independent advisers. In the case of a recommended offer this is usually incorporated in the offer document. Otherwise, such views will be published in the defence document. 5.4.11. Restraints on frustrating action The Code places restrictions on the actions of a target company that might frustrate a bid or prevent its shareholders from deciding on the merits of a bid. During the course of a bid the target company must not:  Sell or issue shares or grant options in respect of unissued shares.  Create or issue convertible securities.  Acquire or sell assets of a material amount (typically 10% of assets).  Enter into contracts other than in the ordinary course of business. In addition, the target cannot withhold information from an unwelcome bidder that has already been provided to other parties. The effect of the above provisions is to prevent target boards using “poison pill” defences, which would be breach of both the Code and directors’ fiduciary duties. Legitimate means that target companies can adopt to resist a bid considered to be damaging to the offeree or at an undervalue would include appealing to a regulatory authority, preparation of a profit forecast, undertaking to pay a special dividend or repurchase shares, and commenting on the value of shares in the offeror that are offered in exchange for shares in target.
  24. 24. PUBLIC M&A Burgis & Bullock Corporate Finance 22 5.4.12. Offer timetable The timetable for a public M&A transaction will depend on whether the acquisition is structured as a contractual offer or scheme of arrangement. Contractual offer Day Key events Day - 28 Offeror announces offer. Day 0 Publish offer document (and prospectus if applicable). Day 14 Target’s defence document to be published (hostile bids only). Day 21 Earliest permitted first closing date of offer. Day 39 Last date (unless Panel agrees otherwise) when target may announce material new information. Day 42 Acceptances by shareholders may be withdrawn after the date which is 21 days after the first closing date if the offer is not unconditional as to acceptances. Day 46 Latest date for offeror to send revised offer document. Day 60 No acceptances or purchases made after this date may be taken into account for the purpose of the acceptance condition. Withdrawals cease to be permitted. Latest date by which offer may be declared unconditional as to acceptances. Day 74 Earliest date on which offer can close. Day 81 Assuming offer declared unconditional as to acceptances on Day 60, all other conditions must be fulfilled by this date unless the Panel agrees otherwise. Day 95 Latest date for despatch of consideration if offer wholly unconditional at Day 81. Scheme of arrangement Day Key events Day - 28 Offeror and target announce offer. Day - 10 File court documents. Day - 2 First court hearing for leave to convene shareholder meetings. Day 0 Publish scheme document (and prospectus if applicable). Day 7 Latest date for revision to the terms of the scheme. Day 21 Shareholder meeting: Court meeting and general meeting of shareholders. Day 40 Court hearing to grant order sanctioning the scheme and confirm any capital reduction. Day 41 Court order filed with Companies House; scheme becomes effective. Day 55 Latest date for despatch of consideration if scheme becomes effective at Day 41.
  25. 25. PUBLIC M&A Burgis & Bullock Corporate Finance 23 5.4.13. Information The Code sets out certain standards for the quality of information provided to shareholders in an offer, which must be presented adequately and fairly and should not be misleading or create uncertainty. The directors of the bidder (and the directors of target in the case of non-hostile offers) are required to take formal responsibility for information contained in offer related documents and advertisements. Particular care needs to be exercised by parties when making public statements about employees, pension schemes, and strategic plans for the target company or its place of business. The Panel has the power to monitor post-offer compliance with any undertakings given by the offeror during a bid. 5.5. The Listing Rules and prospectus legislation If the consideration offered by the bidder is in the form of shares, or a mix of cash and shares, a prospectus is likely to be required. A prospectus, or equivalent document, approved by the Financial Conduct Authority is necessary for any offer of transferable shares to the public or for admission of such shares on a regulated market, including the Official List of the London Stock Exchange. In the case of a cash offer with a loan note alternative, consideration would need to be given as to whether the loan notes would be treated as transferable securities that require production of a prospectus or equivalent document. 5.6. Other regulatory considerations In addition to compliance with the Code, acquirers must comply with other laws and regulations applicable to dealing in listed company shares and M&A in the UK, notably:  Insider dealing rules.  Rules on market abuse, financial promotions, and misleading statements/impressions.  Major shareholder notification rules.  Company law requirements, such as directors’ duties.  Competition regulations and special rules for regulated sectors.
  26. 26. PUBLIC M&A Burgis & Bullock Corporate Finance 24 5.7. Difference between public and private M&A As noted in the following section, in the private arena buyer and seller and largely free to engage on whatever terms this wish in an M&A transaction. The table below highlights the principal differences. Public M&A Private M&A Deal structure Company purchase effected by contractual offer or scheme of arrangement. Can be share purchase or acquisition of business and assets. Negotiations Bidder negotiates with target company Board. Buyer negotiates directly with shareholders. Bid/offer Can be recommended or hostile. Normally must be agreed by all shareholders. Structure Price and form of consideration determined by bidder (with target board if recommended); other terms determined by the Code. Parties free to negotiate all terms. Due diligence Restricted due diligence which must be completed before an offer is made. Extensive due diligence after Heads of Terms agreed; closing usually subject to satisfactory diligence reviews. Warranties and indemnities Generally no warranties. Extensive warranties (and indemnities) from target company shareholders. Securing control Risk that takeover does not succeed if acceptance level not reached. Full ownership usually assured if conditions are met. Post-closing adjustments Not applicable. Common practice. Timetable Governed by the Code; offer period can be up to three months. No defined timetable – could be four to six weeks after Heads of Terms agreed, or several months.
  27. 27. PRIVATE M&A Burgis & Bullock Corporate Finance 25 6. Private M&A
  28. 28. PRIVATE M&A Burgis & Bullock Corporate Finance 26 6.1. Overview Unlike public M&A, participants in transactions not subject to the Code have wide freedom to decide how they contract and on what terms. The purchase process will be affected by a range of factors including the nature of the sellers and whether or not there is an auction process. Therefore, this section only contains a high level summary of the main elements in a private company M&A transaction. 6.2. Assets or shares? If the target business is run by a sole trader or a partnership then the acquisition will take the form of the purchase of the trade and assets, including contracts and goodwill. If the business is owned by a company there is a choice of buying the trade and assets from the company or buying the whole company itself by acquiring its shares from the shareholders. The table below sets out the main differences between the two methods. Share purchase Asset purchase Method of transfer The minimum requirement is a stock transfer form to effect the transmission of shares from seller to buyer. However, in practice, for most deals a long-form sale and purchase contract will be used. Business transfer agreement together with several other documents to effect the transfer of individual assets, such as property, patents, leases and contracts. What’s included? All assets and liabilities of the company, known and unknown, including potential/contingent liabilities. The purchaser can select which assets to acquire and what liabilities to accept. Any liabilities not assumed by the buyer remain the responsibility of the seller. However, some liabilities transfer by operation of law, notably in relation to employees (see section 8). Employees There is no change of employer and employees remain employed by the target company on their existing terms and conditions. Employees automatically transfer to the buyer on their existing terms and conditions. Buyer and seller are obliged to inform employees about their plans and consult with them prior to closing. Warranties and indemnities Given the risk of past liabilities, the purchaser will usually require extensive warranty protection and indemnities against specific risk areas, including tax. The disclosure exercise by the sellers will be correspondingly more detailed and exhaustive. As only known liabilities are accepted by the purchaser, the level of warranties tends to be lower. Given the lower level of warranties, the disclosure process is also likely to be much more limited. Due diligence Given the risk of past liabilities the due diligence process will be comprehensive, typically covering historical accounts, tax, legal contracts and the constitution of the company, litigation, employee and pension matters, property, environmental, and insurance. Likely to be more limited and restricted to commercial and key financial matters.
  29. 29. PRIVATE M&A Burgis & Bullock Corporate Finance 27 Share purchase Asset purchase Relationships with customers and suppliers Trading relationships are unchanged and so there should be no impact on the operations of the business unless key contracts contain change of control clauses. Contracts will need to be novated or assigned to the purchaser. This will require the consent of the other party and while this is usually obtained, unfavourable changes to terms of trade may be requested. Taxation for the sellers Individual shareholders will be subject to Capital Gains Tax on the profit on sale at a rate of 18% or 28%, falling to 10% if they qualify for Entrepreneurs’ Relief. Corporate vendors may be able to obtain Substantial Shareholdings Exemption, meaning they pay no tax on any profit on the sale of a subsidiary. Individual shareholders may be subject to a double tax charge. Firstly, the profit on the sale of the business and assets is taxed in the company, and secondly, the proceeds are taxed when transferred to the shareholders. Corporate vendors pay Corporation Tax on any gains made on disposal. Taxation for buyers No tax deduction in the UK for the cost of investment or goodwill arising on consolidation. Certain funding costs may be tax deductible as they are amortised. A Corporation Tax deduction may be available for the amortisation of certain acquired intangible assets. There is no Corporation Tax deduction available for the amortisation of purchased goodwill arising on the acquisition of business and assets after 8 July 2015 (tax deductions are available for deals closed before this date). Purchase costs will be allowed against any future disposal of the purchased goodwill. Certain deal and funding fees may be tax deductible as they are amortised. Stamp Duty Duty is paid at 0.5% on the total consideration (including deferred and contingent amounts). Stamp Duty Land Tax is charged on property at rates between 1% and 4% depending on the consideration allocated to non-residential land. There is no other stamp duty payable on any other assets. It follows from the above that individual and corporate shareholders will generally prefer a share sale rather than an asset sale because it is more tax efficient and provides a clean break. Conversely, a purchaser may prefer an asset purchase as it reduces the risk of inheriting unknown past liabilities. Historically, it was more financially advantageous for an acquirer to undertake an asset purchase deal because they would receive a Corporation Tax deduction for the amortisation of any purchased goodwill. This tax deduction was ended for new deals from 8 July 2015 and so for a buyer there is little difference in financial terms between a share or asset purchase structure. As vendors usually drive the decision whether to sell, most transactions are structured as share sales in the UK. The main exceptions would be in the following circumstances:  A sale of business and assets of a company that is in administration or liquidation that is overseen by an Insolvency Practitioner.  Carve-out of a division from a company, although typically the seller would want to transfer the division into a new company prior to sale for tax planning reasons.
  30. 30. PRIVATE M&A Burgis & Bullock Corporate Finance 28  Sale of a business at a loss to the vendor where the seller has the ability to make use of that tax loss.  Very small transactions where the costs of due diligence and preparing comprehensive legal documentation is disproportionate to the deal value.  Where the target company has a large and/or unquantifiable liability which the purchaser is not willing to take on. There are circumstances in which a buyer would prefer a share purchase transaction, for example:  Where the target company has important contracts, licences, and consents that are non-transferable.  The target company has tax losses that can be utilised against future trading profits.  The buyer may not wish to alert customers and suppliers to a change of ownership. 6.3. Sales process While there is no prescribed procedure for conducting private M&A in the UK, sale processes generally fall into one of the following categories:  Bilateral transaction involving the seller and one buyer, typically where the buyer has made a direct approach to the sellers, which may include a management buy-out situation.  Auction process, where a seller or their advisers markets the business to a broad range of potential buyers.  Accelerated sales process, where a business in financial difficulty is marketed to a small number of buyers on the basis that a swift closing is sought to protect the target business.  Insolvency sale, in which the trade and assets of a business in a formal administration or liquidation process is sold by an Insolvency Practitioner. In certain cases, business owners may follow a “twin track” process, for example, running an auction process to trade buyers alongside preparation for an Initial Public Offering (“IPO”). 6.3.1. Bilateral v auction sales Clearly for a buyer, entering into sole discussions with a seller is more advantageous than an auction process. It gives the buyer more time and greater access to the company in order to make a proper assessment for valuation and due diligence and enables the buyer to build rapport with management. By avoiding a competitive environment the buyer should be able to strike a better financial deal and maintain confidentiality within the market. Conversely, the seller is less likely to be prepared for the transaction than if an experienced financial adviser was running a sales process and so the information flow may be slow and haphazard and the process for actually negotiating the deal may prove difficult. Waiting for companies to come up for sale is a poor strategy for securing the right acquisition targets at the best price. However, securing a sole discussion with the owners of a business involves some upfront time and cost in developing an acquisition strategy and identifying and approaching suitable targets. This is an area where an
  31. 31. PRIVATE M&A Burgis & Bullock Corporate Finance 29 experienced financial adviser can add significant value by helping to identify target companies that are not yet up for sale and opening up a dialogue with the owners. The strategy for handling an auction process is different from that for a bilateral deal. If you are not to win the deal solely by being the highest bidder then the overriding objective is to break the auction process being run by the seller’s adviser. Again, an experienced financial adviser with knowledge of how various M&A advisers operate can support you with the best tactics to adopt in different situations. For example, many brokers and transfer agents in the UK simply advertise their clients’ businesses for sale but have little involvement in the sale thereafter, and often do not turn up to any meetings. This provides a buyer with a great opportunity to build a relationship with the sellers and/or management at an early stage and learn the non-price issues which matter. Conversely, a tightly controlled auction run by one of the larger corporate finance boutiques may necessitate a strategy of simply bidding through at a high enough level to secure access to management at a later stage in the process or of focusing on your own ability to complete quickly with cash compared to rival bidders who may need to raise funding. Unlike public company M&A, in private company transactions there is no obligation on the seller or their advisers to treat all parties equally or provide the same information to all bidders.
  32. 32. PRIVATE M&A Burgis & Bullock Corporate Finance 30 6.3.2. Auction sale process While each sale process is different, in broad terms most private company auction sale transactions in the UK follow a similar pattern as set out below. Where the seller’s adviser expects a strong level of interest in the business from a range of buyers a more tightly controlled version of the auction might be run. This would involve Vendor and advisers develop sale strategy Prepare information memorandum Research buyers Approach buyers Initial meetings/ presentations Non-binding offers/ valuation proposals Site visits and management meetings Submission of offers Negotiations Heads of Terms Due diligence Legal documents Completion Stage Comments  Buyers are asked to sign a confidentiality agreement  In formal controlled auctions, indicative offers may be requested before management meetings  Seller may provide access to a data room and/or vendor due diligence  Structure paper  Working capital paper where “locked box” mechanism used  Exclusivity period granted to buyer  Cost undertakings  Generally non-binding other than for the above terms  Purchaser due diligence/confirmatory review  Clearances and approvals  Sale and purchase agreement or asset purchase agreement  Service/consultancy agreements  Ancillary agreements  Public announcements  Post-closing price adjustments  Prepared by the seller’s financial adviser  There are no specific regulations in the UK regarding the content of marketing documents for private company sale transactions  Offers are subject to contract
  33. 33. PRIVATE M&A Burgis & Bullock Corporate Finance 31 provision of a timetable to bidders and a requirement to provide initial offers based on the information memorandum alone. Short-listed buyers will then be given the opportunity to meet management and be provided with access to a data room and/or a vendor due diligence report. Purchasers will then submit offers together with a mark-up of the draft sale and purchase agreement provided by the seller’s lawyers. 6.3.3. Accelerated sales process A typical private company sales process may take six to nine months from start to finish. In certain circumstances a deal needs to be concluded more quickly, for example:  The business is under pressure from creditors, including its bank.  Loss, or imminent loss of funding lines.  Loss of a key customer or dramatic decline in demand for the company’s products or services.  The company is incurring losses but cannot afford to re-structure the business in order to reduce its overhead base.  Death of a key shareholder-director. In such circumstances the company’s financial adviser may run a fast-track sales process aimed at securing the sale of the company on a going concern basis. The key differences from a normal sale process are:  The company’s principal lender(s) are usually engaged in the process early on to ensure their continued support while the transaction proceeds.  Focusing on a smaller number of potential purchasers, including key trade buyers and turnaround funds.  There may be a requirement for interim management to provide stability for the business.  Restricted period for purchaser’s due diligence. The marketing of a business under an accelerated M&A process is often the prelude for placing the company into a formal administration process. This potentially enables a purchaser to acquire the trade and assets of the business without all the liabilities that would be assumed under a share purchase. 6.3.4. Acquisition out of administration The management of companies in financial distress is governed by the Insolvency Act 1986 and the Enterprise Act 2002. The Insolvency Act provides a mechanism for potentially viable businesses to be rescued and rehabilitated as an alternative to termination of the trade and liquidation of the company’s assets. A company can be placed into administration by the court, its directors, or by the holder of a qualifying floating charge. Typically, this event will be crystallised when the directors conclude that the company is unable to pay its debts as they fall due. The purpose of the administration, in the order of priority, is as follows:  to rescue the company as a going concern; or  to achieve a better result for the company’s creditors as a whole than would be achieved through a winding-up; or  realising the company’s property to make a distribution to one or more secured or preferential creditors.
  34. 34. PRIVATE M&A Burgis & Bullock Corporate Finance 32 The administration will be managed by a licensed Insolvency Practitioner (“IP”) who is usually an accountant. Following appointment, the IP will decide whether it is viable to continue to trade the business until a sale can be achieved and in so doing may make certain employees redundant. If this is the case, a brief information pack will be prepared and the business is publicly marketed for sale. Owing to the short timescales involved in a sale out of administration and the possible lack of co-operation from management and staff, the quality of information provided to purchasers can be highly variable. Companies seeking to acquire businesses out of administration should bear in mind the following key points:  The IP only has the power to sell unencumbered assets. If the purchaser wishes to acquire or use assets that are subject to financing arrangements they must contact those third parties separately to negotiate an arrangement.  Where the company operates from leased premises it will be necessary either to re-locate the business or secure a new lease with the landlord. In the short-term, the buyer should request that the IP assists in securing a “licence to occupy” from the landlord. Rather than lose a source of income, landlords are often quite flexible in these situations.  Customers will frequently order large amounts of inventory during an administration which can give the misleading impression of an improving trading profile (which the IP will not seek to dispel). In reality, customers are building buffer inventory which may result in a significant drop in orders post-closing or the permanent loss of trade if customers re-source.  The purchaser of a business out of administration does not inherit any past liabilities (other than in relation to employees). Most UK suppliers will accept this situation as a normal business risk and will continue to supply the acquired business under new ownership, but key suppliers could demand payment of past debts before continuing to supply and this should be assessed before closing any deal.  The IP will always rank an immediate cash deal ahead of structures involving large amounts of deferred consideration, however, an IP will consider some deferred or contingent payment options.  As with any other sale of a business and assets, all existing employees transfer automatically to the purchaser on their current terms and conditions.  The IP will provide no warranties to the buyer on sale. In order to avoid disruption to the business and the loss of goodwill that might be generated from a long administration process, it is common practice to conduct a pre- packaged deal (“pre-pack”) for a business in distress. This involves the company’s directors and the proposed IP (before his appointment) negotiating an outline deal with a purchaser before the company is formally placed into administration. Once this is secured the company is placed in administration and the IP completes the sale of the business and assets. This has the advantage to the buyer of limiting customer loss and internal disruption to the business. However, unlike a normal administration process there is no opportunity for the IP to reduce the overhead base through redundancies, so the purchaser must take on the existing workforce in full.
  35. 35. PRIVATE M&A Burgis & Bullock Corporate Finance 33 6.4. Confidentiality agreements Regardless of the type of sales process adopted by the seller, there is normally a requirement for interested parties to enter into a non-disclosure agreement with the seller. This will impose several obligations on the buyer, including:  a duty not to disclose confidential information to any third party;  not to use any confidential information for any purpose other than evaluating the transaction;  not to disclose the fact that the target company is for sale;  not to approach the target company’s customers, suppliers, or lenders.  where the vendor is a listed company there may be restrictions imposed on dealing in the seller company’s shares. Buyers should be alert for the inclusion of onerous terms in confidentiality agreements, such as indemnification clauses or provisions that make the purchaser liable to pay the fees of the seller’s broker. 6.5. Information memorandum and other marketing material Where you are participating in an auction process it is likely that you will receive an information memorandum prepared by the seller’s financial adviser. For share transactions that are classified as regulated activities, which broadly encompasses all offers of shares to the general public, there are very strict rules about what information can be included in a prospectus, which must be issued by an authorised person or firm. However, most sales of private companies fall outside these rules and there is very little regulation covering what can be included in an information memorandum. The document does not need to be approved by any qualified individual and will not form the basis of any subsequent contract. Therefore, care must be exercised when relying on any information in such documents and all key matters should be confirmed through due diligence. As noted later in this section, representations are not usually given by the sellers in M&A transactions, so reliance should not be placed on any seller produced marketing material. The content, length, and quality of information memorandums vary considerably, depending upon the size of transaction, the financial adviser, and the structure of the sales process. The larger corporate finance boutiques and accountancy firms generally produce comprehensive and informative documents. The information memorandums from brokers and transfer agents are often either hyped up marketing material or little more than a short business summary accompanied by a set of accounts. 6.6. Offer letters Offer letters are usually non-binding, but it is important to state in the document that the proposal is “subject to contract” to ensure you are not unexpectedly making an offer that is capable of acceptance and enforcement by the vendor. There is no prescribed format for an offer letter. In an auction process the seller’s adviser will normally specify the matters to be covered in any proposal. In other situations, or where the vendor’s adviser does not prescribe an offer format, the proposal letter might include the following:  Identity of the acquirer.  Price/valuation.
  36. 36. PRIVATE M&A Burgis & Bullock Corporate Finance 34  Structure of the consideration (cash, shares, loans etc.) and when it is to be paid.  Main valuation assumptions.  Principal conditions.  Due diligence requirements.  Funding requirements, if any.  Identity of advisers.  Main reasons why the offer is attractive to the vendors.  Next steps and timetable. 6.7. Heads of Terms Also called “Heads of Agreement”, “Term Sheet”, “Letter of Intent”, or “Memorandum of Understanding”, this document summarises the main commercial and legal points of the deal between buyer and seller. It will be used by the lawyers to prepare the first draft of the sale and purchase agreement. There is no prescribed format for this document. The memorandum usually states that the terms are not legally binding or are “subject to contract” other than in certain specified areas where the parties wish to be legally bound. Typically, the document would include the following:  Details of the parties.  Description of the shares or assets to be acquired and sold.  Consideration and how this is to be discharged, including any deferred or contingent consideration.  Valuation assumptions, for example, that there is no debt in the target company or that historical trading is maintained at a certain level.  Principal conditions, normally restricted to matters such as financing, shareholder approvals, due diligence, and any regulatory approvals.  Price adjustment mechanisms.  How relevant assets that are held outside the business will be treated, for example, property or intellectual property rights.  Future involvement of the sellers in the business (if any).  The main commercial principles to be adopted for the warranties and indemnities.  Relevant law and jurisdiction.  Grant of exclusivity to the buyer, if not contained in a separate document.  Responsibility for costs and cost underwriting/break fees payable.  Confidentiality undertaking or re-confirmation of existing confidentiality agreement. The items in italics would normally be made legally binding on buyer and seller.
  37. 37. PRIVATE M&A Burgis & Bullock Corporate Finance 35 6.8. Consideration structure In private company sales the buyer and sellers have wide freedom to determine both the purchase price and how this will be paid. While cash at closing is clearly the preferred consideration structure for all sellers, most will accept some form of alternative arrangement, which may include one or more of the following:  Deferred payments: can be used to either preserve the buyer’s cash by spreading payment for the acquired business over a period of time, or to protect the purchaser’s position should there be a claim under the warranties or indemnities.  Loan notes: part of the consideration is satisfied by the buyer issuing a formal loan note (promise to pay) to the seller. These have certain attractions to a seller over deferred payments, notably, the loan notes can be secured or guaranteed, giving the seller greater assurance they will be paid, and secondly it may be possible for the seller to defer paying their Capital Gains Tax until the loan notes are redeemed.  Earn-out: this is a variable amount payable to the sellers after closing based on certain agreed performance measures of the business. Normally, the earn-out will be calculated by reference to future sales or profits of the acquired business, but any payment trigger can be used, such as the renewal of a key contract. These arrangements are most effective when the sellers continue to work in the business after closing and the acquired business is maintained as a stand-alone entity. The tax treatment of earn-outs is complex in the UK and specialist advice should be obtained.  Shares: the purchaser, whether listed or not, may issue shares to the sellers of the target business. This raises a number of financial and tax issues for the sellers, including when and how the shares can be sold and for what value. In addition, certain tax reliefs that the owner of a UK company may enjoy may not be available for a minority holding of shares in a non-UK company. As with earn- outs, specialist tax advice should be obtained before the Heads of Terms stage. 6.9. Price adjustment Historically, the usual method to adjust the purchase price was through a set of completion accounts to verify net asset, working capital, and/or cash balances at completion. To the extent that one or more of these balances was above or below target there would be a corresponding increase or decrease in the purchase price. In a number of transactions, particularly in auction sales, the “locked box” mechanism can replace completion accounts. This method provides greater certainty on the final price for the seller and speeds up finalisation of the deal. Under this method the purchase consideration is fixed by reference to a historical balance sheet that has been audited or subject to due diligence review by the purchaser. The deal structure is confirmed by reference to that balance sheet position and economic risk and benefit then pass to the purchaser from the locked box date. This is backed up by indemnities from the seller in relation to any value leakage to the sellers, such as payment of unauthorised dividends or salaries. The choice of completion accounts or locked box will depend primarily on the bargaining power of the buyer and seller, the reliability of the target company’s accounts, and any third party conditions and consents, such as from a funding bank.
  38. 38. PRIVATE M&A Burgis & Bullock Corporate Finance 36 6.10. Due diligence As mentioned in section 3, English law rarely implies terms into contracts freely entered into between parties and so for company or business purchases the principle of “caveat emptor” or “buyer beware” applies. Therefore a buyer should gather as much information about the target business as possible to understand what he is acquiring and whether the right price is being paid. A thorough due diligence exercise will help the buyer to:  evaluate what is being purchased;  decide whether to proceed to closing;  determine the right price;  identify relevant risks and liabilities that may affect the deal;  identify areas where protection may be required in the contract through warranties and indemnities;  identify any third party consents that may be required; and  identify and asses areas that may need action after closing. 6.10.1.Financial due diligence Most M&A transactions will involve some form of financial due diligence, ranging from a review of the books and records by the buyer on a small deal through to the preparation of a comprehensive long-form due diligence report by an accountancy firm on a larger transaction. The success of an acquisition to an acquirer can be significantly enhanced by a focused and rigorous due diligence exercise. It provides assurance to both corporate and financial buyers by analysing and validating the financial assumptions that underpin the deal. The due diligence review enhances the purchaser’s understanding of the target business and so increases the likelihood of the deal achieving its objectives. The scope of a due diligence review will typically be focused on the following key areas:  Determining the underlying profit performance of the business.  Assessment of the cash flow cycle, the ability of the business to turn profits into cash, and working capital requirements.  Robust analysis of any forecasts to assess deliverability and key risk areas.  Evaluation of the balance sheet to identify any over-valued assets and under- valued liabilities or “black holes”.  Analysis of the tax position of the business and tax consequences of the deal.  Review of financial systems and controls. A full report will also typically include information about the history of the business, its structure, products and services, markets, management and employees. In most cases the due diligence will be undertaken by the buyer or their accountants. However, in an auction sale the seller may have commissioned an independent firm of accountants to prepare a vendor due diligence report. This will be made available to interested parties during the auction process and then signed over to the winning bidder with the reporting accountant assuming a duty of care to the buyer. For the seller this arrangement helps to maintain control over the sale process and eliminates the risk of unforeseen matters coming out of due diligence at a late stage.
  39. 39. PRIVATE M&A Burgis & Bullock Corporate Finance 37 While vendor due diligence reports contain useful factual information for a buyer they are usually devoid of opinions and recommendations and may not address all of the buyer’s particular concerns. For this reason it is not uncommon for buyers to commission “top up” due diligence to cover any outstanding areas. 6.10.2.Legal due diligence The process for undertaking legal due diligence usually involves the buyer’s lawyer sending a detailed questionnaire to the seller’s lawyer covering all aspects of the company and its business. The questionnaire will cover matters such as:  Corporate structure and legal constitution  Accounts and financing arrangements  Contracts  Licenses and approvals  Business assets  Property  Employees, including pension schemes  Intellectual property  Information technology  Litigation  Insurance  Environmental issues  Competition matters  Health and safety  Bribery and corruption  Taxation The buyer’s lawyer will then typically prepare a legal due diligence report based on the seller’s responses which highlights the key issues for the buyer and its funders. 6.10.3.Other due diligence Depending upon the size and nature of the target company and the buyer’s knowledge of the market and country, additional due diligence may be required to support the acquisition business case or investigate areas of potential concern. In the UK the most commonly seen other due diligence reviews are:  Commercial/market due diligence: to validate the market size and growth prospects, the target’s competitive position, customer relationships, and assessment of competitors.  Operational due diligence: assessment of target’s manufacturing or other processes, including health and safety.  Insurance: to confirm adequacy of insurance cover.  Environmental: to assess the risk of land contamination or air pollution from the business.
  40. 40. PRIVATE M&A Burgis & Bullock Corporate Finance 38  Actuarial/pension review: where the target company is a participating employer in a defined benefit/final salary pension scheme. 6.11. Sale and purchase agreement In order to effect the transaction a sale and purchase agreement (for a share sale) or business transfer agreement (for a trade and assets sale) are usually required together with an accompanying disclosure letter. In addition, there may be a separate tax deed, or this can be included within the sale and purchase agreement. 6.11.1. Format of sale and purchase agreement This is the main contractual document and must contain all of the detailed terms of the transaction that the parties wish to rely upon. The document usually sets out:  The parties to the transaction.  The purchase price, form of consideration (cash, loan notes, shares etc.) and mechanics of payment.  The mechanism for adjusting the purchase price, that is, completion accounts or locked box arrangement.  For a trade and assets sale, the assets to be transferred and liabilities to be assumed.  Procedure for closing the transaction.  Warranties and indemnities.  Limitations to the seller’s liability.  Tax covenant or deed  Restrictive covenants imposed on the sellers.  Details relating to specialist areas such as property, pensions, employees, intellectual property, and environmental matters. The largest sections of the sale and purchase agreement cover warranties and indemnities. 6.11.2. Warranties and indemnities Warranties are assurances about the target company or its business provided by the sellers to the buyer. As no warranties are implied in English law for corporate transactions it is important that all relevant issues are documented in the sale and purchase agreement. The remedy for a breach of warranty is a contractual action for damages requiring the buyer to demonstrate that the warranty is untrue and this has reduced the value of the company, which may sometimes be difficult to establish. It is unusual to have general warranties on an indemnity basis (i.e. pound-for-pound recovery). In the UK, indemnities are usually reserved for specific issues identified by the buyer that affect the deal price and for taxation matters. In addition, warranties should encourage the sellers to provide further information about the company or business through the disclosure letter which might not otherwise have come to light during due diligence. The scope of warranties will depend upon the commercial deal struck between the parties, the price, and the respective bargaining power of buyer and seller. At one end of the spectrum, an IP will give virtually no warranties regarding the trade and assets being sold while a trade buyer paying a
  41. 41. PRIVATE M&A Burgis & Bullock Corporate Finance 39 premium to enter a new market will expect a full set of warranties from an owner-manager or corporate vendor. Representations are statements of fact or opinion usually made to induce a party to enter into a contract and are different from warranties under English law. The measure of damages in relation to representations is different from warranties and may sometimes give rise to the remedy of recession. In the UK, a seller’s lawyer will strongly resist agreeing to any representations in the legal contract. The seller will seek protection from any warranty claims through the following methods:  Disclosure letter: the buyer cannot make a claim for a breach of warranty that is notified by the seller to the buyer before closing through the disclosure letter.  Limited warranties: certain categories of seller, such as private equity funds, IPs, and trustees may only provide very restricted warranties.  Liability cap: the maximum amount a buyer can claim for breach of warranty is restricted to the price paid. Depending upon the parties and their respective bargaining positions, the cap may be set lower than 100% of the consideration for certain warranties.  Thresholds: there is usually a minimum claim level (individually and for the claims in aggregate) that must be reached before a claim can be made against a seller.  Time: in most cases, other than in relation to taxation, the time limit for bringing a claim is between one and three years from completion.  Alternative recovery: if the seller has the ability to recover its loss from another source, such as insurance, it must do so in preference to making a warranty claim. Unlike warranties, indemnities are generally not qualified by the seller’s disclosure letter and may not be subject to a minimum claim level. 6.11.3. Restrictive covenants When purchasing a business the buyer will want to ensure that the seller is not going to compete with the acquired business which might impair the value of the goodwill that has been acquired. Typically, this is secured by undertakings from the sellers that they will not:  compete against the acquired business;  solicit away any customers, suppliers, or employees of the business;  use the trade names of the business; and  disclose any confidential information about the business to third parties. In order to be enforceable under English law, these undertakings must be reasonable in scope, duration, and geographical area. If the restrictions are too extensive they could be considered unreasonable and a restraint of trade and would, therefore, be invalid. 6.11.4. Completion Accounts The valuation of a business in an M&A transaction is usually based on the assumption that the target has a certain level of net assets, working capital, or cash at closing. The purchase agreement will usually provide for this to be verified through the preparation of completion accounts that set out the net asset value (and other relevant balances) as at closing.
  42. 42. PRIVATE M&A Burgis & Bullock Corporate Finance 40 The purchase agreement should state who is responsible for preparing the completion accounts, the time limits for doing so, and the procedure in the event of a dispute between buyer and seller. However, the most important part of this section is the methodology for preparing the completion accounts, which typically includes:  Specific accounting treatments for certain items as agreed between buyer and seller.  The historical accounting treatment as adopted by the target business in his past accounts.  Generally accepted UK accounting principles. An alternative approach would be the use of a “locked box” mechanism. The deal price is agreed between buyer and seller based on a historical balance sheet, such as the latest audited accounts or management accounts that have been reviewed by the buyer before closing. There is then no post-closing adjustment, effectively the buyer takes on the financial risk or benefit of the target business from the locked box date. The buyer is protected from the sellers extracting value after the locked box date (such as through dividends or excessive salaries) by an additional set of warranties and indemnities. The locked box mechanism is most commonly seen in a seller’s market and where the target is a stand-alone business with robust accounting records. 6.12. Disclosure letter As noted above, this is a letter from the seller to the buyer which acts to qualify the warranties and is typically supported by a large bundle of accompanying documents that provide detailed information regarding any known matters that may give rise to a breach of warranty. The letter is an important part of the seller’s protection and so a properly advised vendor will seek to include as many matters as possible that could give rise to a warranty claim. For a buyer, there are two main objectives during this stage of the transaction:  To ensure that any material matters are disclosed as early as possible in order that they may be properly evaluated.  To ensure that the disclosures are specific and detailed. Vague and all- encompassing disclosures are of little use to the buyer in assessing risk and may unintentionally give the seller much wider protections than is desirable. 6.13. Tax deed In most share sales there will be a deed of tax indemnity (or tax covenant) that may be included in the share and purchase agreement or prepared as a stand-alone document. The usual market practice in the UK is for the sellers to indemnify the buyer on a pound- for-pound basis for any pre-closing tax liabilities in the target company not arising in the ordinary course of business and tax liabilities not disclosed or included within relevant accounts. There is no tax deed for a business asset transfer as any tax liabilities remain with the selling company. Historically most deeds incorporated a seven year period for making claims in line with the period that HMRC has to make enquiries into a company’s past tax affairs. However, HMRC has recently reduced its usual enquiry period to four years and there is some movement in M&A transactions to reduce the indemnity period in the tax deed accordingly.
  43. 43. PRIVATE M&A Burgis & Bullock Corporate Finance 41 As tax legislation is constantly changing it is important to obtain professional advice on the contents of the tax deed rather than relying on a past precedent. 6.14. Financial assistance Following the implementation of the Companies Act 2006, there is no longer a general prohibition on a UK private company providing financial assistance for the purchase of its own shares. In M&A transactions such financial assistance would normally be in the form of a loan from the target to the acquirer where the target business has surplus cash funds, or target permitting its assets to be used as security to enable the buyer to raise finance from banks and other external parties. However, the target company’s directors must still fulfil their statutory duties and ensure that the proposed transaction is in the best interests of the company and that it does not constitute an unlawful distribution. A target public company (whether listed or unlisted) and its public and private subsidiaries are still prohibited from providing financial assistance for the acquisition of shares in the target public company. A public company is also prohibited from providing financial assistance for the acquisition of shares in its private holding company. In order for a public company to provide financial assistance it would first need to re-register as a private company, which may not be possible until after closing of the relevant transaction.
  44. 44. FINANCING THE ACQUISITION Burgis & Bullock Corporate Finance 42 7. Financing the acquisition
  45. 45. FINANCING THE ACQUISITION Burgis & Bullock Corporate Finance 43 7.1. Funding sources Where an overseas acquirer needs to raise third party financing to support an acquisition it has a wide range of available sources in the UK including:  Commercial banks  Asset finance houses  Private debt funds  Debt capital markets  Private equity funds 7.2. Commercial banks The five largest bank funders for acquisitions by volume of deals are Lloyds, HSBC, Barclays, The Royal Bank of Scotland (including its subsidiary NatWest Bank), and Santander. In addition, there are a wide range of smaller and specialist lenders to the commercial and corporate sectors including Yorkshire Bank (part of National Australia Bank), Allied Irish Bank, Bank of Ireland, and Aldermore Bank. For acquisition finance the banks will generally provide loan facilities, although alternative structures such as overdrafts, revolving credit facilities, invoice discounting/factoring, and hire purchase/finance leases may also be offered. A term loan will be a committed facility over the life of the loan, generally drawn at its inception and which may be repayable in instalments over the life of the loan (amortising) or as a single bullet repayment at the end of the term. The term of commercial mortgages (a loan secured on property) can be up to 10 years with most other commercial loans having a term of one to five years. The banks can be flexible on most terms in order to tailor the loan to the needs of the client. Banks will generally assess the amount of funds they are prepared to advance by two criteria:  Security: the amount and quality of the tangible asset security offered for the lending, including property, plant & machinery, and accounts receivable.  Serviceability: the ability of the borrower to service the debt measured by reference to key metrics such as interest cover and the ratio of debt to operating profit. With the recovery in the financial position of most banks since the 2007/9 financial crisis, their appetite to lend has increased. While leverage levels for most small and mid-market deals are lower than before the financial crisis, the main commercial banks remain the first choice of debt funding for many acquirers in the UK. 7.3. Asset finance houses There are a wide range of asset finance providers in the UK ranging from international groups such as GE Capital to national “challenger” banks such as Shawbrook and specialist boutique funders. The principal focus of most of these funders is lending against accounts receivable. However, many funders have expanded their product ranges and provide additional funding against plant and machinery, inventory, and, in some cases, property.
  46. 46. FINANCING THE ACQUISITION Burgis & Bullock Corporate Finance 44 For small and mid-market transactions the process for securing asset finance is generally quicker and less expensive than for bank loans. 7.4. Private debt funds While significantly less developed than in the USA, there has been a growth in the number of private debt funds in the UK since the 2007/9 financial crisis. This growth has been driven by both the lack of funding from the main commercial banks, particularly for leveraged deals, and the poor rate of return that investors were receiving from traditional asset classes. Private debt funds have been established by the banks, insurance companies and other financial institutions, and high net worth individuals. Originally focused on supporting private equity sponsors and corporate acquirers with lends of £50 million plus, their lending sizes have reduced over the past few years. The features that make private debts attractive to acquirers are:  Amount of lending: typically a fund will advance a greater sum than a bank by combining a senior loan with a mezzanine loan in a single instrument (“unitranche”).  One lender: a unitranche arrangement means the borrower only has to deal with one lender, rather than two or more if it needs to secure senior and mezzanine loans, making the decision making process simpler.  Speed: as loans are provided by one fund the borrower can achieve certainty of funding quicker than if dealing with multiple senior and mezzanine funders or a loan syndicate.  Flexible terms: the funds can be flexible in covenants and capital repayment, making them suitable for complex business structures.  Lower debt service burden: usually non-amortising with bullet repayment at the end of the term which preserves cash for acquisitions and capital expenditure. Debt funds operating in the UK include Ares, HayFin, Alcentra, European Capital Beechbrook Capital, M&G Investments, H.I.G., and BlueBay. 7.5. Debt capital markets This form of funding involves the issue of tradeable debt securities to investors in return for loan capital. Interest is paid during the term and the capital is repayable on the specified maturity date. This form of financing may be preferable where a company has direct access to a range of investors. If the issue is large and the maturity of the debt varied then the cost of the capital may be lower than for private debt or mezzanine financing. In addition, the security and covenant requirements will be less restrictive than for bank or private debt lending. The offering of bonds to the public is regulated by the FCA and requires the issue of an approved prospectus. Certain exemptions from regulation may be available if the bonds are only issued to institutional investors. If the bond is to be listed on a stock exchange to enhance its marketability, the approval of the UK Listing Authority (which is operated by the FCA) is required.
  47. 47. FINANCING THE ACQUISITION Burgis & Bullock Corporate Finance 45 7.6. Private equity funds The UK has a large and well developed private equity market, ranging from funds that support early stage and technology businesses through to international investors that support multi-billion pound leveraged buy-outs. Most private equity firms in the UK are independent, raising their funds from banks, insurance companies, pension funds, and individuals. As private equity funds generally seek most of their return through a capital gain secured on the growth in the equity value of their investments they may not be suitable funders for many corporate acquirers. However, some private equity funds have provided finance to companies for acquisition and investment, structured as a minority shareholdings with loans or preference shares. We have advised on a number of corporate venturing type deals between companies and private equity funds, and so this source of finance should not be rejected by overseas acquirers, particularly where the availability of normal debt finance may be limited.
  48. 48. COMMON DEAL ISSUES IN THE UK Burgis & Bullock Corporate Finance 46 8. Common deal issues in the UK
  49. 49. COMMON DEAL ISSUES IN THE UK Burgis & Bullock Corporate Finance 47 8.1. Overview The UK is generally an open country in which to conduct business and undertake acquisitions with limited restrictions on who can acquire UK firms and how deals are conducted. However, there are a number of particular aspects to some UK laws and business practices that overseas buyers need to be aware of that can sometimes hinder or break potential deals. 8.2. Accounts In the UK, the annual accounts of companies may be prepared in accordance with International Accounting Standards (“IAS”) or under UK Generally Accepted Accounting Practice (“UK GAAP”). For companies reporting under UK GAAP, the default position is that they prepare accounts under Financial Reporting Standard (“FRS”) 102, or FRS 101 for relevant qualifying entities. If the company meets the appropriate criteria it may prepare accounts under the Financial Reporting Standard for Smaller Entities (“FRSSE”) or the Financial Reporting Standard for Micro Entities (“FRSME”) but they are not obliged to do so. For unincorporated businesses, such as sole traders and partnerships there are no prescribed accounting standards. The UK reporting regime as at September 2015 can be summarised in the diagram below. 1 Certain types of incorporated bodies and business undertakings are not permitted to report under FRSME or FRSSE even if they meet the relevant size criteria. 2 Limits increase to £10.2m turnover and £5.1m balance sheet total as from 1 January 2016. Owing to the differing reporting regimes for business entities in the UK it is possible that a target company’s accounts may not be prepared in a manner that is consistent and comparable with an overseas acquirer. In addition, as the reporting regime in the UK has changed over the years up to 2015 it is possible that the accounts of a UK company may not have been prepared consistently year-on-year. Incorporated businesses including companies and limited liability partnerships Unincorporated businesses International Accounting Standards UK Generally Accepted Accounting Practice (“UK GAAP”) IAS and IFRS FRS 101 FRS 102 FRSSE1 FRSME1 All companies with securities listed on a recognised stock exchange Meets two of: (i) turnover less than £632,000; (ii) balance sheet total under £316,000; and (iii) less than 10 employees Meets two of: (i) turnover less than £6.5m; (ii) balance sheet total under £3.26m (net); and (iii) less than 50 employees2 All incorporated businesses not entitled to prepare accounts under FRSSE or FRSME Qualifying companies that wish to use the recognition and measurement bases of IAS/IFRS but with reduced disclosure Not applicable Income Tax (Trading and Other Income) Act 2005 All unincorporated businesses including sole traders and partnerships Business Entity Reporting Regime Regulation Application

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