Technical Knowledge

Retention of title clause

= in contract for sale of goods, ensures that title remain vested in the seller until the buyer fulfils certain obligations (typically payment of the price)

Disclosure letter

Any exceptions to warranties are put into a disclosure letter - saying that these 'warranties are true subject to what is in the disclosure letter.' Brings to the buyer's attention of all the liabilities of which the seller is aware, therefore falling outside of warranties and liabilities

Debt or equity financing? Advantages of debt financing

1. NO LOSS OF CONTROL = shareholding is unaffected 2. INTEREST ON TAX IS DEDUCTIBLE = the interest you pay reduces your overall profits, which means less tax on remaining profits 3. TERM LENGTHS = there are a variety of term lengths to choose from in which to pay back the cost of the loan 4. RETURN ON INVESTMENT RE EQUITY MIGHT BE HIGHER DUE TO THE "LEVERAGE EFFECT" = see example - if interest rates are low, can boost returns 5. Easier and faster = depending on the size of the loan and the credit rating of the borrower, bank loans may be easier and faster to implement 6. BONDS = issuing bonds gives the issuer access to a wider breadth of investors (e.g. possible individuals known as "retail investors") via the capital markets. This may make raising capital easier.

Debt or equity financing? Advantages of equity financing

1. NO REQUIREMENT TO PAY BACK THE CAPITAL RAISED 2. NO INTEREST = needs to be paid (although shareholders may expect dividends). 3. INVESTOR INSIGHT = investors may provide their insight and expertise - 'dragons den' effect - wealthy individuals are increasingly acting as angel-investors, whereby provide funding, advice and access to their network in exchange for an equity stake in the company 4. PUBLIC COMPANY = if the borrower (the buyer) is a public company, it has access to wider capital markets and may find share issuances easier 5. RISK = spread across multiple shareholders thereby diminishing risk held by existing shareholders 6. NO SECURITY OR COLLATERAL IS NEEDED

Share or asset purchase? Disads of share purchases

1. Need to convince target shareholders to sell their shares - Depending on the constitution of the company, there may be scope for minority shareholders that are opposed to the transaction to refuse to take part and thereby prevent the transaction - However, the most sophisticated companies are likely to have shareholders' agreement which usually includes a provision which compels minority shareholders to take part in the transaction if a set amount of the other shareholders agree (e.g. 75% or 90% of the shareholders overall) 2. Acquirer takes on all of the target companies obligations and liabilities

Debt or equity financing? Disads of debt financing

1. SECURITY = banks may demand security or collateral in return for a loan/bond 2. FACTORS AFFECTING INTEREST RATES = depending on the borrower's credit rating, reputation and economic climate, interest payments may be considerable 3. CAPITAL RAISED MUST BE PAID BACK = or else the lender(s) can take security (i.e. take control of your business). Likely to be restrictive terms imposed on the business during the term of loan/bonds

Liabilities: current liabilities

Current liabilities = generally due within a year of the balance sheet · Payroll expenses · Rent payments · Utility payments · Debt financing · Accounts payable · Other accrued expenses

Liabilities: What to look out for

DEBT - Examples: Outstanding loans, unpaid overdrafts, payments owed to suppliers, distributors or customers and bonds that have been issued and have not yet matured - and to take these off the purchase price - Could ask for a warranty that no undisclosed debt exists PENSION SCHEME LIABILITY - Purchasers will be liable for future pension payments that a company is obliged to make - thus lawyers must check whether the target company has enough capital to set aside to fulfil these liabilities and could request a warranty regarding the state of a company's pension scheme OUTSTANDING LITIGATION - Purchaser should SECURE AN INDEMNITY from the seller against any such costs that may later arise and/or an UNDERTAKING that any ongoing litigation will be SETTLED BEFORE THE ACQUISITION IS COMPLETE

Types of debt financing

DEBT 1) Bank loans 2) Bond issuances

Due diligence factors: Growth opportunities

Due diligence should include an assessment of growth potential to quantify the likely return on your investment. That means analysing performance and profits as well as identifying the specific elements driving the value of the business. What capital expenditures and other investments will need to be made to continue growing the business, and what are the company's current capital commitments? Assess target company's addressable market and growth opportunities; technology compared to current alternatives; find out if the TC has a competitive advantage over other suppliers; assess the risk that disruptive technology could have on displacing products offered by the TC; synergies?; significant and loyal customer base?; market position.

Due diligence factors: Human Capital

Human capital is an intangible asset or quality not listed on a company's balance sheet. It can be classified as the economic value of a worker's experience and skills. This includes qualities such as education, training, intelligence, skills, health and other values such as loyalty and punctuality. HC is required for companies to achieve goals, develop and remain innovative. Executive organisation and golden parachute implications; define all HR related liabilities; organisational charts and headcount; Employee demographics; HR metrics and structures for performance management, payroll and recruiting; employee databases; surveys or interview employees; discipline policies; code of ethics.

Due diligence factors: Location

Important to appraise the geographical structure and location of the company. Geographical location could be dependent on customer base and the service you are aiming to provide; regulatory and financial conditions dissimilar in different jurisdictions; tax liabilities in different jurisdictions; competition and antitrust for merger approvals; contrasting filing and registration processes for incorporation and fees; more complicated jurisdictional legal questions. Foreign in some jurisdictions: government approval must be obtained for foreign acquisition of domestic targets (e.g. China); foreign investors may need an investment license; must obtain approval before acquiring shares in certain restricted areas; in asset purchases, prior approval may be needed for foreign acquisition of land.

Due diligence factors: Tax

Important to assess any tax carryforwards and their potential benefit/disadvantages to the buyer. Tax due diligence should evaluate the following: Federal, state, local, and foreign incomes sales and other tax returns filed in the past 5 years; government audits; copies of any correspondence or notices regarding filed (or omitted) tax returns; tax sharing and transfer pricing agreements; net operating losses or credit carryforwards; IRS Form 5500 for 410(k) plans; agreements waiving or extending the tax statue of limitations; allocation of acquisition purchase price issues; correspondence with taxing authorities regarding key tax items; settlement document with IRS or other gov tax authorities. Consider tax indemnity provided by Seller; structuring the transaction; obtaining financing; negotiating contract terms; tax structuring and tax planning.

Due diligence: Health and Safety

Important to consider environmental, social and health and safety due diligence as part of M&As. Should review: Data room reviews; Red Flag Reports; Environmental Health and Safety Assessments (EHS); Consideration of ESG (Environmental, Social and Governance related issues); environmental audits; results of tests or audits of the company's properties and neighbouring facilities; hazardous substances used in the company's operations; environmental permits and licenses; correspondence, notices, and files related to EPA, state or regulatory authorities; environmental/health and safety litigation, claims, or investigations; indemnification obligations; asbestos; petroleum products other than passenger vehicles; records from any public agency investigation of the company's properties or any neighbouring properties with respect to environmental/health and safety laws.

Due diligence factors: Supply Chain Management

Important to investigate a potential business partner in a modern supply chain as they are increasingly diverse. SCM should include: Inventory analysis; outsourcing analysis; cycle time from purchase order to received payment to measure profitability and cash flow; supplier performance; forecasting accuracy; supply risks and mitigation; supply restrictions; transportation costs; spend management; supplier terminations; supplier contracts; inventory systems; inventory obsolescence.

Due diligence factors: Corporate objectives

Important to understand corporate objectives that relate to the business as a whole, its values and desired performance. Why is the owner selling the company? What are the business plan and long-term strategic goals of the company? Has the company recently acquired or merged with other companies? How will the company strategically fit into the Buyer's organisation? What synergies will be obtained? What is the company's target base and sales pipeline? Top customers? Competitive landscape? Financial/operational synergy? Growth? Market power? Corporate tax savings? Tax incentives? Acquire needed resources? Diversification?

Due diligence factors: Assets

Material assets of a company are key to the M&A transaction. Important to consider the total value of all assets and any debts or liabilities against the company. Following assets are appraised: Inventory stock; real estate; equipment; technology; and research and development.

Price chip clause

Parties estimate the value of the claim and reduce the purchase price by such an amount

Due diligence factors: Debtor relations

Relationship existing between the debtor and creditor. Who are the debtors? Voluntary of involuntary debt? Liens against property? Conflicts surrounding past, present and potentially future defaults on debt?

Due diligence factors: Ongoing litigation/disputes

Buyer needs to review any pending, threatened, or settled litigation, arbitration, or regulatory proceedings involving the target company. Any filed or pending litigation or complaints? Settled litigation and terms of settlement? Has there been any claims threatened against the company? Consent decrees, injunctions, judgements, or orders against the company? Attorney letters to auditors? Insurance covering any claims? Any matters relating to arbitration? Pending or threatened governmental proceedings? Any employment disputes? INDEMNITY !! UNDERTAKING !!

Due diligence factors: Real estate

Buyer needs to thoroughly inspect the fundamentals of the property, seller, financing and compliance obligations fo mitigate financial uncertainties. Legal title to properties; local authority searches and local land charge search; environmental and flood search; raising enquiries of the Seller; physical inspection; other jurisdictions; real estate leases; purchase agreements; deeds; mortgages; title policies; surveys; zoning approvals; vacancies; use permits.

Due diligence factor: Corporate structure

Buyer should always conduct a fastidious review of the target company's corporate structure, capitalisation, organisational documents and general records. This can include: Charter documents/incorporation documents; company constitutions; organisational charts; a list of security holders; employee share plans; options granted to acquire securities; good standing and tax authority certificates; list of subsidiaries and respective charter documents; list of jurisdictions in which the company and its subsidiaries are qualified to do business; stock options; warrant agreements; stock sale agreements; stock appreciation rights and related grants; stockholder voting agreements; stock-related preemptive rights; agreements restricting the payment of cash dividends; agreements related to the sale or purchase of the business.

Due diligence factors: Market Reputation

Buyers should deliver a reputational risk assessment of the target company being acquired to complement the existing commercial and legal due diligence processes. Assessment should answer key questions about the target company, such as: Is it under or over performing on reputational profile relative to its competitors and sector? Have any potential reputational issues been discovered in other due diligence processes? What is the impact on price, margin, growth or brand health? Has reputational damage impacted share prices? Does the company have any environmental, contract or liability issues that could materialise and cause financial harm? Any adverse headlines, social media chatter? Regulatory intervention? Political intervention and how could that impact growth?

PESTLE

a) POLITICAL • Influence/impact of gov policies on overall economy and/or a particular industry; tax, fiscal and trade policies • Could political instability, corruption or bureaucracy impact upon an industry's profitability? b) ECONOMIC • How is the local/global economy performing? • What is the effect of this performance upon firms in a particular industry? • Are consumers generally spending or saving? • How do inflation rates, tax rates, saving rates impact upon industry profitability? • Is the industry growing? • Is there ample foreign investment occurring? Does this affect the way businesses price their products/services? c) SOCIAL • Cultural trends • Seasons • Ethical issues that affect the media/consumers' perception of the industry d) TECHNOLOGICAL • How important is IP? • Use of AI? e) LEGAL f) ENVIRONMENTAL • Could rules relating to waste disposal, climate change or subsidiaries affect the ability of firms within an industry to generate a profit? • How dependent is the industry on the weather?

SWOT

a) STRENGHTS • Does it have unique/popular products? • Unrivalled research capabilities? • Particularly talented employees? • Strong customer loyalty and strong branding? • Competitive advantage? b) WEAKNESSES • Is the company struggling financially? • Are its products outdated? • Does the company lack strong brand recognition? • Has the company tried to deal with its weaknesses? c) OPPORTUNITIES • Which opportunities are currently available for the company to exploit? • Is the market growing? • Is consumer behaviour changing in a manner which would benefit the company? • Are other opportunities likely to arise in the future? d) THREATS • Which external factors could negatively affect the company? • Is the market shrinking? • Is the market becoming saturated? • Is the government regulating the market more heavily? • Are consumers spending less? • Are these factors affecting all firms in the industry, or just the company in particular?

What is a security?

essential form of protection for lenders, refers to a right given by a borrower to a lender that entitles the lender to take control of some or all of the borrower's assets if the borrower fails to repay the loan as agreed

Why do companies take over each other?

o 1) Move into a new market o 2) Take out a competitor § Market domination = if the company is likely to become market dominant (become so big in a particular market that it can control prices) the competition regulators in the UK and EU may step in to stop a takeover or only permit it subject to certain conditions (i.e. the bidder, if successful, must sell off part of the target's business)

M&A Structure - Phase 1: readiness and preparation Offer document

o Actually issued by the bank on behalf of the bidder o Is a contractual offer to buy all of the shares in the target o Sets out the bidder's plans for the target and the relevant financial information including details of the bidder's shareholding in the target o 'Selling the bid' = must also 'sell' the bid to the target's shareholders, giving reasons why the bidder would do a better job of running the target than the target's existing directors have done. o Claims cannot be excessive otherwise the target can complain to the Takeover Panel which will make a ruling o Must comply with City Code

Antitrust concerns

o Are there any antitrust concerns? o What other businesses is EC involved in? o Will the sale trigger an investigation by the European Competition Authorities? o Perhaps demand that EC divest some assets to level up the playing field. § Which ones? § How much will this cost? § Is it worth it for this deal?

Players in an m&A deal: shareholders

o Bidder's shareholders § May have to consent to the takeover (partic if new shares are being issued) o Target's shareholders § Recipients of the bid - its fate is in their hands

Due Diligence (Overview)

o Buyer will carry out due diligence on the target business - this is the process pursuant to which the buyer will conduct a detailed review of the target's business to assess whether it is worthy of purchasing at that price o At a minimum, will want to carry out legal and financial (or commercial) due diligence on the target business - includes an assessment of all information on the target business made available by the 'data room'. o Covering all aspects of the target company, from its operations through to its intellectual property.o Buyer will carry out due diligence on the target business - this is the process pursuant to which the buyer will conduct a detailed review of the target's business to assess whether it is worthy of purchasing at that price

M&A Structure - Phase 1: readiness and preparation Concert parties

o Concert parties = getting friends to buy shares - all of the shares held by members of a CP are aggregated (added together) to see if the thresholds of stake building rules are triggered

M&A Structure - Phase 1: readiness and preparation Closing date

o First closing date = point at which the bidder can either i) let the bid lapse (abandon it), ii) extend it, or ii) declare it unconditional as to acceptances (means that the bidder has acceptances of its offer in respect to at least 50% of the target's shares)

Phase 3: Transactional Documents SPA (main terms: flexible payments)

o Flexible = the final sale price for the shares may be flexible, depending on the performance of the target company's business following the sale. § Completion accounts = if this is so, a set of completion accounts will be prepared that show the true value of the company at the point of sale. This way, the price for the shares can be adjusted if the business doesn't perform as expected - requires complicated drafting and the involvement of finance professionals to ensure that a fair price is achieved, and that the document reflects the parties' expectations

Players in a M&A transaction: bidder

o If the bidder succeeds = will end up owing the shares in the target and the target will therefore become its subsidiary

Venture capital firms

o Like PE, aggregate funds from institutional investors and private individuals, then aim to buy or invest in business and subsequently sell at a profit o However, tend to focus on the earlier stages of investee businesses (e.g. start-ups) and invest in small equity stakes, whereas PE firms tend to invest in more mature companies and invest larger stakes, using a combination of cash and debt

M&A Structure - Phase 1: readiness and preparation Acquisition of minority interests

o Once a bidder has 90% of the target's shares, it can compulsorily purchase the remaining 10% but on the same terms as the original offer o If the bidder doesn't want to buy them out, minority shareholders can force them to o Squeeze-out = happens because being a minority shareholder in a company isn't usually much fun if the majority shareholders start running the business for its benefit not yours. So either side (bidder or minority) can squeeze out on the same terms as everyone else - fair

Data Room

when conducting due diligence, lawyers are given access to the seller's data room, helping the bidders understand the target in greater detail and allowing them to discover any potential issues

Phase 3: Transactional Documents SPA (what does it do?)

· I) Describe the amin commercial terms of the transaction = what shares are being sold; the identity of the buyer and seller; the sale price; and what each promises to do to carry out the sale · II) Contain protections for the buyer · III) Contain key information about the business · IV) Set out a timetable for the sale process · V) Contain confidentiality provisions to keep details of the transaction private · VI) Describe any conditions relating to the sale = for example, the buyer obtaining licensing approvals or consents to carry on the business

Liabilities: Long-term liabilities

· Leases · Loans · Bonds payable · Provisions for pensions · Deferred tax liabilities

Indemnification clause: recoverable losses

· Loses = judgements; settlements; fees; costs; expenses · Liabilities = composed of debts and other legal obligations · Claims = damages resulting from third-party lawsuits · Causes of action = damages resulting from the right to seek relief

Phase 3: Transactional Documents SPA (main terms: price)

· Price o SPA should specify the price for the shares, specify the currency and timescale for the sale, and list any other conditions. Usually the payment is made in cash, although sometimes the buyer may offer the seller some of its shares, or issue loan notes to the seller. o Price may be fixed or varied

Indemnification clause: Hold harmless provision

· Terms are typically paired and interpreted as a unit to mean 'indemnity.' · May require the indemnifying party to advance payment for covered unpaid costs and expenses even when the defined recoverable damages are limited to losses · If the "hold harmless" provision is omitted, the IP does not become responsible for the losses until the indemnified party makes payment

What is insolvency and what can companies do to avoid?

• when cannot pay debts on time, or when the total of its liabilities exceeds its assets. Potential arrangements to avoid this are; o Renegotiating the terms of the loan o Raising additional finance (issuing new shares if demand for the company remains) o Monitoring profitability and improving cash flow (cost cutting undertaking regular and thorough review of the company's business plan, objectives, accounts. The company may try to extend credit periods with existing suppliers, find cheaper alternative suppliers. Customer debts could also be collected more effectively and dividend payments could be temporarily suspended).

Due diligence factors: Contracts

Reviewing all material contracts and commitments held by the target company is one of the most critical parts of due diligence. It is important to question if there are any of the following: Guaranties, loans and credit agreements; customer and supply contracts; agreements of partnership or joint venture; limited liability company; settlement agreements; past acquisition agreements; employment agreements; exclusivity agreements; agreements imposing any restriction on the right or ability of the company to compete in any line or business or geographic region; contracts involving payments over a material dollar threshold; real estate leases/purchase agreements; license agreements; powers of attorney; franchise agreements; equity finance agreements; distribution, dealer, sales agency or advertising agreements; non-competition agreements; union contracts and collective bargaining agreements; contracts the termination of which would result in material adverse affect on the company; any approvals required of other parties to material contracts due to a change in control or assignment.

SPAC

SPAC (Special Purpose Acquisition Company, 'blank check' company) = company without commercial operations and is formed strictly to raise capital through an IPO for the purpose of acquiring or merging with an existing company

Due diligence factors: Valuation

Valuation is the process of estimating the value of a company. Also how long it will take for the Buyer to recoup the investment.. Considerations include: Quality of earnings; identify usual or non-recurring adjustments; significant operating and financial trends; bridging operating periods. (P/E) ratio, price/earnings to growth (PEGs) ratio, and price-to-sales (P/S) ratio.

What kind of company?

What kind of company? · Limited company? · Limited partnership? · Where is it registered to be both tax efficient and allow it to do the things EC wants it to do - which is to access the revenue of the MG business so that EC can pay the interest on debt

People involved in due diligence?

When one company buys another, it also buys the people who work there If EC want to retain senior team, employment and benefit lawyers will get to work to: · understand migrating salary packages · Have to look at the labour laws in each of the jurisdictions PE - many PE funds looking at a business will restructure it to make it more efficient · What employment issues will they encounter? · What will they expect from unions?

Phase 3: Transactional Documents SPA (main terms: condition precedents)

1) Consent of shareholders = Where buyer/seller is a public company - listing rules may required that they get the consent of their shareholders to the transaction 2) HMRC clearance = party to the deal might ask that HMRC give clearance to the transaction to make sure that taxes such as capital gains are not payable (capital gains = tax paid on profit when you sell something that has increased in value) 3) Competition authorities = if the business is operating in a competitive sector, may require clearance from the relevant competition authorities. 4) Regulatory or licensing consent = if operates in highly regulated sector such as banking and insurance 5) Third-party consents = selling shares is usually more straightforward than selling business assets, for key contracts to remain in place after the sale like leases, the consent of landlords and other third parties may be needed 6) Consent of the shareholders and waiver of their pre-emption rights = if purchase price involves seller shares · Pre-emption rights = rights which protect an existing shareholder by ensuring they're made aware of any potential movements in shares

Types of equity financing

1) IPO 2) Share issuances

Acquisition structure (overview)

1) Pitch - Pitch to clients in order to be selected as legal advisor 2) Internal/external checks - Check that they are not engaging in work with any projects or for any clients that may give rise to a conflict of interest - Know your customer = checks on prospective clients to ensure that don't pose a risk in terms of money laundering etc 3) Initial instructions - Ascertain the client's primary objectives and agree with the client a fee structure and approximate timetable for the execution of the proposed transaction 4) Resourcing - Managing transactions involves co-ordinating with different practice areas internally to source the required specialist advice 5) Auction process or bilateral sale - Auction = bidders competing to buy a target -- sellers will want to keep number of bidders involved for as long as possible; maintains competitive tension -- help secure higher prices and better terms -- 'rounds' - will then select preferred bidder -Bilateral sale = seller and buyer 6) Buyer protection - Due diligence 7) Deal execution - Structure the transaction - Negotiate the main deal terms - Draw up key transaction documents - Ensure that the required financing is in place

Recommended vs hostile bid

1) Recommended bid = the directors of the target company recommend the bid to their shareholders (i.e. they advise their shareholders to accept the bidder's offer) 2) Hostile bid = if the shareholders reject the bid, then the bid becomes hostile (or contested) - i.e. the target companies do not wish to be purchased (always regarded as acquisitions) § Assuming the bidder doesn't withdraw its offer, may persist in attempts to persuade the targets shareholders to sell their shares to it § May argue, for example, that the target's management are inept and if it succeeds it will then sack the target's board of directors. § Risk is that if the bidder fails to win, its own management may be tarnished: its claim that it could make a better first of running the target than its existing management will be seen to have been publicly rebuffed.

Share or asset purchase? Disads of asset purchases

1. Acquirers will not garner total control of the target company itself - This can cause the acquirer to lose out on important intangible assets and employees, and risks missing certain assets it should have purchased 2. Challenging to persuade a company to agree to an asset purchase if the acquirer wishes to buy assets that are integral to the target company - The target may fear that they are 'hollowed out'

Share or asset purchase? Ads of asset purchases

1. Choose what assets they want or need Do not pay for or receive any more than they choose 2. Less subjective Buying individual material assets is less subjective when it comes to price unlike with a SPA where it is challenging to work out the value of intangible assets 3. Does not take on all of the target company's obligations and liabilities Assumes less risk 4. Legal due diligence process likely to be faster than SPA - needs only to be conducted in respect of the assets being acquired, rather than the whole company

Share or asset purchase? Ads of share purchases

1. Entire business Acquirer will receive the targets entire business, including intangible assets,such as brand loyalty 2. Easier and more straightforward Generally speaking, as you acquire the highest company/companies in the structural chain and through that gain control of any subsidiaries There is no need to revalue the specific assets of the target business 3. More tax efficient May be more tax efficient as the acquirer may be able to take advantage of tax credits for depreciation or amortisation The acquirer can also offset some of the cost against tax on the grounds of capital expenditure allowances

Debt or equity financing? Disads of equity financing

1. LOSS OF CONTROL = selling shares to other investors dilutes ownership in the business. Sometimes these new shareholders ask for additional rights as well (for example, to put a director of their choosing on the borrower's BOD) 2. PUBLIC SHARES = issuing shares publicly can be a costly and lengthy process due to associated administration and regulation 3. PROFITS SPLIT = gained by the business must be split amongst more individuals.

Indemnification clauses (overview)

- Can include an indemnification clause in the SPA (assuming that buying shares rather than assets - as assume liabilities) - This is essentially the sellers promising the buyer that they will pay any damages and/or costs associated with any lawsuits - Provision pursuant to which the seller promises to pay money to the purchaser on the occurrence of aspecified event to compensate for loss incurred post-acquisition by either the purchaser, the target, or both. Will provide compensation to the party that suffers the loss - provides the means to apportion risk - Will protect against any financial loss associated with the litigation

Why need tax specialists?

- Differences in how payments to an AV are taxed in different jurisdictions - Differences in jurisdictions about releasing cash from the target group to pay the interest and repay the debt Example: Germany - much more restrictive laws to the extent which companies can do this than the UK - international expertise in banking law is also required

Acquisition vehicle

- First thing the buyer will want to do is establish an acquisition vehicle - separate new company to own and run MG - organisation that has been formed by the Partnership to acquire one or more investments on behalf of the partnership, or as nominee of the Partnership

Confidentiality agreement / NDA

- For the benefit of the sellers - Purpose = to prevent he buyer from disclosing sensitive, confidential information about the seller/target discovered during the due diligence process or using the info for a purpose unconnected to the proposed acquisition.

Warranties

- Warranty = promises regarding the state of all aspects of the company's operations, which, if not true, allow the buyer to seek compensation from the seller - statements of existing fact contained in a contract which, if breached, could give rise to claims for damages in contract or tort law - Amount to promises about the present condition of an object, entity or state of affairs - Include promises such as: · The seller owns the business · The business is free from charge · All licenses and consents to the sale have been obtained · The seller is not aware of customers that will defect · There is no litigation · No infringement of legislation · No breaches of contract · Also cover the accounts (that they give a true and fair view of the state of the company) including level of debtors and creditors · As well as any tax, insurance, employees and pension liabilities - Purpose? · To flush out information about the company · Disclosure letter = any exceptions to warranties are put into a disclosure letter - saying that these 'warranties are true subject to what is in the disclosure letter.' o Brings to the buyer's attention of all the liabilities of which the seller is aware, therefore falling outside of warranties and liabilities - Deemed disclosure = publicly available information that the buyer could be expected to find out for himself

Due diligence factors: Accounts

Target company's financial position should be scrutinised by Buyers. Concern lies in company's historical financial statements and related financial metrics, as well as the reasonableness of the target's projections of its future performance. Buyers should look at: What do the company's annual, quarterly, and monthly financial statements for the last three years review about its performance and condition? Are the company's financial statements audited, and for how long? Do the financial statements outline all liabilities of the company, both current and contingent? Are the margins for the business growing or deteriorating? Are projections for future reasonable? How do projections for current year compare to board-approved budget for the same period? What working capital will be necessary to continue running the business? What capital expenditures and investments will need to be made to grow the business? Current capital commitments? Unusual revenue recognition issues? Does the company have sufficient financial resources to continue operating and cover its transaction expenses between time of diligence and estimated closing date of acquisition? Quality and sustainability of historical earnings? Operating margin profile? Underlying cost structure look like?

Due diligence factors: IP

The Buyer should take interest in the company's technology and intellectual property as Intellectual Property Rights (IPRs) can form a significant proportion of a company's assets. Buyers should aim to identify a company's IP assets, determine their value, and address their transferability. Intellectual property covers patents, trademarks, copyrights, domain names and trade secrets. What domestic and foreign patents (and pending patents) does the company have? What registered common law trademarks and service marks does the company have? What copyrighted products and materials are used, controlled, or owned by the company? Does the company's business depend on the maintenance of any trade secrets, and if so what steps has the company taken to preserve their safety? Has the company taken appropriate steps to protect its IP? What confidentiality and invention assignment agreements does the company have with current and former employees and consultants? Are there any material exceptions? Is, or has, the company infringed on IP rights of a third party? Are any third parties infringing the IP rights of the company? Is the company involved in any IP litigation or disputes (can be costly), or received any licence or demand letters from third parties? What technology in-licenses does the company have and how critical are they to business? Has the company granted any exclusive technology licenses to third parties? Is the company party to any source or object code escrow arrangements? What indemnities has the company provided to (or obtained from) third parties with respect ot possible intellectual property disputes? Are there any other liens or encumbrances on the company's intellectual property?

"Take private"

To buy all the shares of a public company and therefore take it back to being private

Indemnification clauses: 2 types

· 1) Third party indemnities = protect the indemnified party from loss or damage resulting from third party claims · 2) Inter-party indemnities = protect the indemnified party form loss or damage resulting from the indemnifying part's breach of contract or warranty

Share or asset purchase? APA

o Rather than buying the shares of the company, can buy bits of it o Buying the whole of the company can be risky --- the buyer doesn't really know its history or whether it has any hidden liabilities - is it about to be sued? Does it owe tax? o 'Cherry picking the assets' o Seller can inject these assets into a separate company in order to sell the shares in that company o Hive-down = advantage that the new company is clean (no risk of hidden liabilities) o Generally, only used when part of a company is being used o Buyer/subsidiary assumes none, or some of the related liabilities of the seller o Favourable because the buyer can select the assets and liabilities they desire to assume o Often when want to acquire a single business or division with a company o May be disadvantageous for sellers as they may be faced with adverse tax consequences because of allocating purchase prices to the assets o May also end up losing important non-transferable assets such as permits or licenses o Can include: § Land § Patents § Trademarks § Brands § Goodwill § IP § Equipment used to produce goods or perform services o Things your company owns and that have monetary value (meaning they can either be sold or used by the company to make products or provide services that can be sold). o Concrete terms: cash, inventory, property + equipment, marketable securities (investments), prepaid expenses + money owed to you from payers o Also includes intangibles of value, e.g. patents or trademarks

M&A Structure - Phase 1: readiness and preparation Bid timetable

o Takeovers are policed by the Takeover Panel - City Code on Takeovers and Mergers o Hostile bids create uncertainty for both companies and so the sooner the outcome of the bid is known the better o A bidder usually has the advantage - it has been preparing the bid for months in advance, but targets don't want to be caught unawares so nowadays many public companies have their defence already mapped out in advance in case a bid materialises o Bid starts when the bidder informs the target of the bid o Publicly announced = bid is then publicly announced o Offer period = the offer period then begins which means that the bidder must prepare its offer documents within 28 days o The bidder can continue to buy shares in the market (subject to restrictions on stake building) but it has to raise its offer if it buys shares at a higher price than the offer price o Announcement = bidder must also post an announcement of bid to shareholders - it will approach S's in the target to get irrevocable undertakings to accept the offer and these count towards the stake building thresholds

Base rate

o The rate of interest at which banks can borrow money from the Bank of England

M&A Structure - Phase 1: readiness and preparation Reverse takeover

o This is where a bidder is smaller by market capitalisation (how much the company is worth, calculated by number of shares in circulation x the share price) than the target o Target's shareholders become the majority shareholders in the bidder o Requires approval of bidder's shareholders because they lose control of their company

Private equity firms

o Usually invest in target businesses that have high growth potential o Then work with those businesses and manage their teams to increase their value - over a period of typically 3/7 years o Hopefully sell for a significant profit

Due diligence: what is looked at?

o What is it that we are buying? § What does the company own? § What are its liabilities? § Who does it have contracts with? § Is anyone suing it right now or about to? § Does MG own its IP? § Does MG own its brand? § Will its suppliers have provisions in contracts to pull out or re-price in the event of an acquisition? § Lawyers job to find this out.

Share or asset purchase? SPA

o Where a company takes over another by buying all of its shares o Can be through offering shares in the buyer's company, cash or other consideration o Usually offers to pay them their own shares (although the bidder is also required to offer a cash alternative) o Target becomes the bidder's subsidiary o Completed through a SPA o Buyers have to negotiate with the seller's shareholders, as well as agree on the warranties / representations / liabilities regarding the target business to ensure that the investment is a safe one o May acquire 100% or just a majority of the outstanding shares = company remains intact but has different shareholders o Recommended bids = recommend to shareholders o Hostile bid = shareholders do not agree

M&A Structure - Phase 1: readiness and preparation First defence circular

o Within 14 days, T must post FDC to its shareholders, which sets out its reply to the bidder's plans

Phase 3: Transactional Documents SPA (main terms: deferred payments)

o poss that sale price of the company is paid over a period and by instalments, depending on how the company performs after completion. § may be calculated with reference to its profits earned post-sale, for example, or the meeting of performance targets set by the buyer. § Should include the amount; timing of payments; interest; and payment protections in case of default

Force majeure clause

predetermine the allocation of risk and free each party from liability if specified circumstances arise that are beyond the control of the parties and prevent either party from fulfilling their obligations

Indemnification clause: escrow account

third party holds money until a certain condition is met · Provides the seller with guarantee that the indemnifiers would pay for the lawsuit · This would have the sellers place funds in escrow for a certain amount of time · The amount of time is subject to negotiation - buyers would want longer; sellers shorter · Reasonable time period = 6-18 months after post-completion

Phase 3: Transactional Documents SPA (main terms: earn-out clause)

price based on the earnings of the business under new ownership. 1) Contractual provision stating that the seller of a business is to obtain additional compensation in the future if the business achieves certain financial goals, which are usually stated as a percentage of gross sales or earnings 2) Differing expectations of a business between a seller and a buyer are usually resolved through an earn out 3) Earnout eliminates uncertainty for the buyer, as they only buy a portion of the sale price upfront and the remainder based on future performance. The sellerreceives the benefit of future growth. Example: if an entrepreneur seeking to sell a business is asking for a price more than a buyer is willing to pay, an earnout provision can be utilised - for example, could be a purchase price of £1 million plus 5% of gross sales over the next three years. Pay-out is dependent on a number of factors: · Size of the business · Future financial performance Structure of an earnout · Determining the crucial members of the organisation and whether this is extended to them - Length of the contract? - Executive role within the company post-acquisition - Agreement should specify accounting assumptions that will be used going forward · Company can adhere to generally accepted accounting principles (GAAP), there are still judgements managers have to make that can affect results - Changes in strategy · Such as a decision to exit a business or invest in growth initiatives may depress current results - the seller should be aware of this in order to come up with an equitable solution

Undertaking?

promises to take further action in the future / refrain from taking further action in the future

Due diligence: Competition clearance

seek approval (competition clearance) for proposed mergers or acquisitions - must usually be secured from the relevant UK and EU competition authorities in advance (CMA Competition and Markets Authority)

Indemnification clauses: De minimis provision

stipulates a minimum threshold that a single indemnification claim must exceed in order to be eligible for indemnification. E.g. if the threshold was set at £50,000, a claim for £49,000 would not be paid out. This provision is to the seller's benefit as it ensures that the seller is not pestered with minor claims

Indemnification clauses: Ceiling provision

stipulates the cap which limits the amount the indemnifier is required to pay for a given claim. For example, if the cap was set at £50,000, a claim for £60,000 would only have a pay out of £50,000. This provision is to the seller's benefit as it reduces their liability.

Phase 3: Transactional Documents SPA (main terms: earn-out clause - ads and disads)

§ Ads and disads · Ads o (BUYER) Longer period of time to pay for the business rather than all upfront o (BUYER) if earnings are not as high as expected, do not have to pay as much o (SELLER) Ability to spread out taxes over a few years, helping to reduce the tax impact of the same · Disads o (BUYER) Seller might be involved in the business for a longer period of time = thus might want to provide assistance to boost earnings or use their previous experience to run the business as they see fit o (SELLER) If the future earnings are not high enough, they do not make as much from the sale of the business § Example · ABC Company has $50 million in sales and $5 million in earnings. A potential buyer is willing to pay $250 million, but the current owner believes this undervalues the future growth prospects and asks for $500 million. To bridge the gap, the two parties can use an earnout. A compromise might be for an upfront cash payment of $250 million and an earnout of $250 million if sales and earnings reach $100 million within a three-year window or $100 million if sales only reach $70 million.

Players in an M&A deal: Venture capital firms

§ Aggregate funds from institutional investors and private individuals, and then aim to buy or invest in businesses and sell at a profit § Focus on earlier stage investee businesses and invest in small equity stakes, whereas PE firms typically invest in more mature businesses and in larger stakes

Players in an M&A deal: Investment banks

§ Assist and advise corporations looking to raise capital § May help arrange loans for byers, or agree in advance to do so if their client is a prospective buyer and is later chosen as the preferred bidder § Connecting clients to potential investors § Promoting and facilitating the sharing of bonds § Informing valuations of companies and identifying financial risks

Players in an M&A deal: Lenders

§ Financed, in part, by debt § Will look at credit rating, track records, commercial intentions, ability to offer security, relationships with existing lenders

what information will the seller provide the buyer with?

§ Financial information = relating to the company's activities, its customers and market for its products or services, as well as bank account details, loans and other financial commitments § Accounts and financial projects § Tax information § The ownership structure, identity of shareholders and classes of shares § Any existing or threatened litigation § Property = details of property, whether owned or leased § IPR = such as trademarks or patents § Employment = employees and details of any pension schemes § Management and company structure = including the makeup of the board and identity of any subsidiary companies

Players in an M&A deal: Board of Directors

§ Governing body of a company, elected by shareholders in the case of public companies, to set strategyand oversee management § Board typically meets at regular intervals § Every public company must have a BOD § Some private companies and non-profit organisations also have BODs § Makes key decisions on issues such as mergers and dividends, hires senior manages, and sets pay § Makes decisions as a fiduciary on behalf of the company and its shareholders § Responsible for helping corporation set broad goals and supporting senior management in meeting these goals § Who does it include? · CEO · Senior managers · Board members not affiliated with the company · Inside director = company employee · Independent/outside directors = only involved with the company thorough board membership

Players in an M&A deal: Private equity firms

§ Invest in target businesses that have a high growth potential and are not listed on stock exchange § Might invest in public companies with the intention of taking them private § Pool money from external investors into what is called a fund, then use the money in that fund - as well as money borrowed rom lenders, to finance their acquisition of, or investment into, a range of businesses. § May initially look at 100 businesses, consider 10 of these and end up purchasing only 4 § These businesses will usually be established companies that are either underperforming or undervalued § Once an acquisition is complete, will work with that business to increase value over a period of around 3-7 years before 'exiting', hopefully with a profit § What do they do? · Improving operational efficiencies · Cutting costs · Improving synergies · Driving greater revenue · Divesting (selling or shutting down) non-core or less profitable elements of the business · Improving discipline around capital and cash flow

Players in an m&A deal: Brokers

§ Monitors the market and reports back on market sentiment (how the bid is seen in the market; whether the target's shareholders are likely to sell to the bidder); tracks the share purchases in the target; handles any purchases by the bidder of the target's shares; and, since the bidder's shares are to be listed (the fresh ones being offered to the target's shareholders), the broker will liaise with the LSE.

Players in an m&A deal: Lawyers

§ Represent the buyer = advice on structuring and whether or not to enter into the transactions § Representing the seller = advice on sale process and deal structure, and evaluating bids from multiple potential buyers § Due diligence § Negotiation and documentation/contracts § Arrange financing = this could come from banks or other types of investors; they will wish to have some kind of security for their investment, e.g. participation in shareholding, taking out a mortgage over property or other collateral § Gather all the parties for the completion of the transaction, ensuring all assets have been properly covered by written documents that are properly signed and witnessed. § Finalise all post-completion registrations and procedures § Need ot be conversant in variety of legal disciplines and know when to refer matters to a specialist, for example in merger control (competition), employment, property or tax

Phase 3: Transactional Documents SPA (overview)

§ Sets out the terms of the transaction § Fairly distributes the risks and rewards of the transaction § Main contract used in the private sale of shares § Purpose = main purpose is to set out the deal terms in writing, specify any conditions to the sale (such as getting regulatory consents), allocate risk, and protect the buyer by limiting the seller's ability to set up a competing business

Players in an M&A deal: Business angels

§ Wealthy individuals who invest their personal income in early-stage business in exchange for equity , § Beneficial if the angel has knowledge of the industry

Players in an M&A deal: institutional investors

§ With specialist knowledge that buy, sell and manage investment securities in large quantities on behalf of others. Examples include pension funds, insurance companies and hedge funds

Types of debt financing 2) Bond issuances

• Bonds = debt instruments (really IOUs) • Only really worth doing for substantial amounts of money - e.g. £100m with an interest rate of 5% for 10 years, meaning bondholder gets back £5 million every year for 10 years • Tend to be issued by public companies • UK listed companies, debentures = issue debentures which are domestic bonds issued in the UK in sterling and listed on the LSE as debt instrument o Often secured over the companies assets so if default, can seize assets that are charged with the payment of that debenture • Issued by public companies and governments • US government = Treasuries • UK government = Gilts • Majority of bonds pay a fixed rate of interest and are called fixed-income securities • Bond markets are the largest financial markets in the world and the US is the single largest market • Eurobond market = international bond market where bonds are issued outside the issuers home country often in a foreign country • Bond issues are rated by credit rating agencies • Bonds have maturities ranging from a matter of days (commercial paper) to more than 20 years long (long bonds) • Would not dilute ownership and may benefit from 'leveraged effect' • Usually easier to ask for waivers or favours with banks than bondholders • Good relationships with banks = means that will be some flexibility in agreements. • Bond issuances are much more formal = usually requires the borrower negotiating with a trustee who acts on behalf of bondholders • Sold more widely = to investors globally, than loans (usually to a bank or smally syndicate of banks), the cost of borrowing is often cheaper when using a bond than a loan (although set-up costs for the bond can be more costly).

Types of debt financing 1) Bank loans

• Loans = have to be held until maturity or redemption (until it is repaid by the company) • Bond contrast = bonds do not have to be held until m/r - the bondholder can sell the bond to someone else - tradable securities whereas loans are not (although are more tradable now via derivatives and securitisation) • Variations in interest rates = can be based on factors such as reputation / credit rating / relationship with the banks --- often reflects on how likely the bank things that the borrower will repay the money (i.e. companies with a low credit rating are perceived as risky will pay a higher rate) • "Leveraged effect" = impact of debt on return on the equity investment - using leverage contrastingly amplifies the garnered profits (and losses) • Acquired assets may become a collateral for the loan = whilst this is a disadvantage, this is mitigated by the fact that the acquired business can act as its own collateral - means that should the business be unable to service the loan, the assets acquired during the transaction could be seized as opposed to the acquiring company losing some of its original assets. • Lowers financial risk = as 1) have not used their own money to buy the business and 2) acquired assets could act as collateral for the debt • Does not dilute the ownership of the business, unlike equity financing = existing management may be significant shareholders - taking out a loan (or issuing bonds) means that management maintains their level of ownership in the business and proportion of the profit (in the form of dividends, if paid).

Types of equity financing 2) IPO

• Private - public • Available to the public to buy shares in the company • Individuals will invest in companies that are likely to use that capital in the most effective way to generate profitswhich in turn can be invested as capital in other deserving companies • Need to be an attractive business to potential investors • Prospectus = company provides detailed financial information o Important don't do anything underhand as can lead to prosecution • Shareholders = whenever the company is proposing to do anything, will consult shareholders through circulars o Leveraged acquisition? § Enterprise capital does not have £950 million lying around § Instead, plans to buy MG by investing around £350 million in shares or other equity from a fund that is raised from investors § Borrowing the remaining £600 million from banks (Debt finance) § Idea is that by running MG better, EC will generate higher revenues and use this to service the interest payable on the £600 million of loans § In a few years, will sell MG for a higher price § Goal = make MG not worth £950million, but £1.3 bn § Sells = EC can pay back the bank and see its own stake £350m double to £700m

M&A Structure - Phase 1, readiness and preparation Offer

• Process begins with a direct approach from a potential buyer, a 'fishing exercise', or auction process instigated by a seller, looking to identify a buyer to sell to o The bidder makes an offer to the shareholders of the target to buy their share prices from them for a certain price. o Usually offers to pay them in its own shares, but the bidder is also required to offer a cash alternative - to allow them to accept its bid but to be paid in cash rather than the bidder's shares

Types of equity financing 1) Share issuances

• Public companies - can issue shares • Company is a legal entity with shareholders and directors • If... already a public company = conducting an IPO doesn't make sense • Could 1) issue shares to existing shareholders (a 'rights issue') or 2) to new shareholders • Good standing with shareholders (consistently paying dividends) and lucrative investment opportunity = evidence that this may be a good option • Dilution of ownership = profits of the business will be divided between more shareholders • Influence = may give greater influence if have greater shares - powerful shareholders may try to force into doing things that are not in best interest • Dividends = get dividends when the company makes sufficient profit to pay on shares • Expansion = reinvest profit to expand business - provide for the value of shares to grow • Realisation of investment = sell shares in order to gain a profit on their investment • Shareholder rights issues = if a company issues new shares, it has to offer them to existing shareholders in the same proportions as their existing shareholders. So if I own 10% of a listed company, have to offer 10% of that fresh share issue to them - right of pre-emption in respect of them - ensures that share of the percentage of ownership of the company is not diluted • Secondary issues can depress the company's share price because: o Existing shareholders have to stump up money for the new shares just to retain their existing percentage of the company's capital o The market fears bad news and thinks the company needs an equity injection just to support the business o Assumption that companies only issue new shares at the top of the market when they feel their shares are overpriced.

Indemnity?

• promises to reimburse the other party if certain costs arise o To allocate and mitigate risk, breaches of warranty, undertaking or representations, they may have to pay damages for breach of contract