Luxembourg Tax = Disgraceful!

The Guardian's special investigation into Luxembourg's tax arrangements with multinationals is staggering.

http://www.theguardian.com/business/2014/nov/05/-sp-luxembourg-tax-files-tax-avoidance-industrial-scale

However, for anyone who professionally advises in the field of tax driven corporate structures it will not come as any surprise.

Now this is becoming more open - governments need to 'get to grips' with it. 

Broadly - from a corporate law perspective under English law, any director who does not utilise these (admittedly - arguably legal) structures to save their company's tax - is in breach of their duties (however 'morally ambiguous' that may be).

The tax distortions it creates are hugely damaging to society in that (for example) physical 'bricks and mortar' retailers on British high streets pay relatively huge amounts of tax and are driven out of business, while e-tailers pay next to no tax.

The competition is unfair, and while I am totally in agreement with competitive tax rates between states - the practices referred to are simply abuse. 

With most of the world's developed economies running (generally large) budget deficits you would have thought that the politicians and their civil servants would be interested in sorting this situation out - It surely cannot be unpopular with the electorate (but I fear that I am ascribing a level of competence to them - which may be causing you to laugh long & hard?!)

Discuss? / Offline / Sometime!

Dan.Johnson@EquitableLaw.com

+44 (0) 7788 537 187 (U.K. Cellular Tel.)

Equitable Law's Model Articles of Association and Subscription & Shareholders Agreement Available for Use

We are delighted to announce that Equitable Law's template model 'Articles of Association' and 'Subscription and Shareholders Agreement' for British companies have now been fully prepared for use with our clients. 

Any limited liability company which has a shareholding structure involving  joint ownership (of any description) needs to put in place these documents - so as to deal with the unavoidable uncertainties of future circumstances in the development of the relevant company's affairs.

Reproduced below are the front pages and contents tables - giving (we trust) an indication of the documents' contents.  While these are fully comprehensive documents (containing a large number of detailed provisions), we believe these documents can be adapted for every conceivable joint ownership structure, from a quasi-partnership individuals' venture, through to management buy-out and substantial parties' joint-venture arrangements.  

 
Please contact us if you would like to discuss using these documents in such circumstances as are relevant to you.

Regards

Dan.Johnson@EquitableLaw.com

+44 (0) 7788 537 187 (U.K. Cellular Telephone)   

'Entrepreneur Handbook' Caps A Busy Summer of Investments - Advised and Assisted by Equitable Law's Dan Johnson

The Summer of  2014 was extremely busy for Equitable Law in terms of legally advising and assisting in relation to share based investments in United Kingdom (and international) based ventures.  It seems that in a continuing era of low interest rates upon cash deposits and a lack of bank provided debt finance - 'business angel equity investors' continue to seek to 'fill the funding gap'.   

The nature of our client base means that many of the relevant investments are highly confidential and / or commercially sensitive, such that although we would dearly like to tell you much more about the investment transactions that we have recently assisted with - such as those involving a high profile sports personality investing in one of the businesses that services them, and the cutting-edge British based technology venture which received investment from a significant mainland-Europe based engineering group - our lips are sealed!

However, the most prominent of our Summer 2014 investment transactions was the second round of share based investment into 'Entrepreneur Handbook' (www.entrepreneurhandbook.co.uk), a web based publisher creating articles, guides, resources and more to help aspiring entrepreneurs get to the next level of the development of their ventures.

Following Entrepreneur Handbook's seed round investment by West of England based Marmaduke Holdings in 2013 (upon which we also advised), we advised Entrepreneur Handbook in taking a confidential / undisclosed amount 'A Series' round of share based investment from the China based Shanghai Zhezhou Industry Co. Limited - best known for its 'Uno Ventures' operations (www.unostartups.com).

Pinsent Masons' Glasgow (and Shanghai) offices advised Uno Ventures.

Equitable Law (Dan Johnson) advised 'Entrepreneur Handbook' and its founder, Mr. David Friel and commented : 'We were delighted to be again engaged by 'Entrepreneur Handbook' to assist with their equity funding arrangements.  As one of the most prominent ventures associated with this area of the U.K. early stage business corporate finance scene this further invitation made us extremely proud'.

Mr. Friel commented : 'It is always a pleasure to take sensible commercial legal advice and assistance from Dan - and we are delighted by the smooth completion of this transaction which allows Entrepreneur Handbook access to the massive Chinese market through the connections of our new investor.' 

Thoughts Upon Problems With Structuring Business Ownership Through Companies Limited By Shares

Reproduced below are a pair of articles I recently wrote for publication within 'The Evolutionist', the web-zine of advisory client, Evolution Capital :-  

http://www.evolutioncapital.com/news-articles/kiss-off-when-keeping-it-simple-may-well-be-stupid

K.I.S.S. (Off) – 

When Keeping It Simple May Well Be Stupid

In a recent online poll seeking to establish the public’s view of the greatest invention ever created in the United Kingdom, one high ranking contender might well surprise you. Admittedly helped by a social media campaign amongst corporate lawyers (= ‘Sad’ – I know!), a contender which scored highly was ‘the limited liability company’, a business structure which was radical at the time of its first creation and in their initial uses.

Limited liability companies (in their early incarnations) had an unsurpassed ability to raise large amounts of capital from numerous investors for significant large scale business ventures (e.g. railways), allowing the providers of the capital to hope for profits, but be comfortable that the most they could lose was their investment (as reflected in their shares) - and (save for that loss) that they had no responsibility for a venture’s liabilities. Generally, (in their early incarnations) the shareholders were unlikely to be involved in the management of the company, and to protect the passive nature of their ‘stake’, company law rules sought to rigidly protect their rights as shareholders.

However, modern business life has seen limited liability companies habitually used in numerous much smaller ventures, frequently with very limited (if any) initial capital requirements (often no more than a nominal sum), and with the various ‘stakeholders’ generally being closely involved in the management of the venture (i.e. as directors of the company).

These business structures are (in truth) ‘quasi-partnerships’, and arguably would be more appropriately structured as partnerships, i.e. akin to those utilised by accountants and solicitors etc. Partnerships generally allow a much more flexible approach to stakeholder interests in the business, crucially being much easier structures within which to make adjustments between partners as businesses evolve and the partners’ roles within them change (as inevitably happens - over time).
However, until relatively recently, the only readily available and easily accessible U.K. business structure which provided the crucial advantage of limited liability was a company, generally formed with liability limited by shares. Even though the U.K. business landscape now has legal business vehicles such as the limited liability partnership, for various reasons – including, predominantly the relatively low corporation tax rates on retained profits which limited companies enjoy, this has meant that - the vast majority of quasi-partnership structured businesses continue to operate within a structure of a limited liability company.

It is now possible in this internet age for entrepreneurs to form limited liability companies online in a matter of minutes (and at a very low cost). Often the limited time expended in such a process (and the negligible costs involved) means that thoughts over the structure receive little (if any) attention. Further, the lack of experienced professional input (often absent - due to limited funds for professionals fees in the early stages of a business) means that the structure which is settled upon is remarkably simplistic and with very constrained ability to change – leaving it fraught with potential future problems.

This situation is referred to as the ‘Dragons Den syndrome’ (after the TV show of that name), where the moneyed backers of any particular venture are limited (by the producers) to only two criteria, the amount of cash to be invested and the proportion of pure equity stake which the backers might receive in the particular business in return for that cash.

The reality is that most venture capitalists, (including most of the half-dozen or so individuals who have appeared on Dragons Den over the years) use much more sophisticated ownership structures in relation to their investments, because those backers appreciate that they need to put in place structures which can evolve over time and (crucially) which allow the managers that the ‘Dragons’ are proposing backing to be incentivised on a long term basis so as to produce a ‘win-win situation for all’.

However, to revert back to the reality of business life – we are often approached by businesses which are owned within stakeholder structures which have arisen (or evolved) with limited (if any) appropriate professional input, often still reflecting a simplistic position which was settled in the early or historic stages of a business, and which structures are now not conducive to the further development of the particular business – in many cases limiting the potential to create much larger value (for all stakeholders).

If these situations are not resolved, the feelings of frustration experienced by important stakeholders with the lack of fairness in the business structure can often seriously impair the ability of the business to progress and expand, and at worst, may lead to a catastrophic shareholder dispute (to the extreme detriment of the underlying business and its stakeholders).

The types of problems that we see are numerous (and confidentiality does not allow us to outline examples), but they can (for example) include historic founders of businesses, who now feel that they are entitled to be ‘sleeping partners’ (i.e. cease to have active involvement in the business, and that the other stakeholders should carry them as passengers), and / or new or second tier management who feel that their shareholding stake in the business does not adequately reflect the increase in value of the business which they consider they are creating.

We are regularly approached in the early stages of potential business sale transactions where the stakeholders know that if they could resolve their current stakeholder issues, they may well together be able to successfully expand their business at a much faster rate, creating significantly more value (for the benefit of all) in a subsequent transaction.

If you would like an analogy, ‘the bakers’ have prepared a cake mix with clearly defined portions - but they know that if they could adjust those ‘stakes’ so that everybody felt in agreement with fully co-operating further in ‘the baking process’, the cake might successfully rise - so that their ‘bit of the cake’ might be considerably larger than may otherwise be the case - for the benefit of all involved (Work with me on this one!).

Often the stakeholders know that they have an issue which would potentially benefit from being resolved between them, but the party who is in the first instance initially at an advantage (under the historic structure), is often reluctant to make the first move, thereby potentially showing a ‘sign of weakness’.

Alternatively, the party who is in the first instance initially at a disadvantage (under the historic structure), may well be extremely motivated to ‘resolve the position’, but does not have the experience nor expertise to propose an alternative structure which produces an equitable (i.e. fair and reasonable) result between the stakeholders.

The underlying business’ established professional advisers may be hopelessly compromised in terms of assisting the stakeholders. In a worst-case scenario - it may have been them who actually produced the structure which is now experiencing problems; or (frequently) because they are closely aligned with certain stakeholder(s) who are most reluctant to change the status quo, usually being the holder(s) of the majority stake in the relevant business.

Matters become further complicated because any ‘transaction in securities’, in layman's terms any arrangement by which current value is transferred from one of the stakeholders to another of the stakeholders may well give rise to charges to taxation (which if nothing else can be agreed upon, is clearly understood by the stakeholders as being something to be avoided!).

We have repeatedly found ourselves able to assist business owners in terms of revising their ownership stakes, profit shares and management arrangements for the good of all.
Getting the relevant interested parties ‘around the table’ is only possible when each stakeholder can foresee the benefits of the proposed revised structure, and consider that their ‘slice of their pie’ is to be a fair one. In next month’s article: “An Offer You Cannot Refuse – or – A Horse’s Head in Your Bed” we will ‘drill down’ into motivators for effecting an reorganisation of stakeholder interests, including ‘carrot and stick’ approaches.

http://www.evolutioncapital.com/news-articles/an-offer-you-cannot-refuse

An Offer You Cannot Refuse

 Last month I reviewed the merits of a limited liability company (and the potential considerable drawbacks in the way that stakeholder interests are habitually structured within them).
I was subsequently (reminded by a colleague) of a Paul Weller song as sung by David Bowie: ”Oh we’re absolute beginners, with nothing much at stake”.

The nothing (in a company starting up) may well become something of substantial value in a few years, with the potential to soar even further. Alternatively, if potential issues with stakeholder interests (arising after start up) are not addressed, that value may ‘level off’, decline or in a worst case scenario plummet.

In this month’s article we discuss the pitfalls where the equitable re-distribution of ownership (and the accompanying benefits) can be problematic at best and un-achievable at worst.

Often, most of the solutions revolve around the principle of being able to calculate the current market value of the business (which has been achieved under the current stakeholder ownership structure). Once this has been established, it can form the underlying basis of formulating how (in particular) the ownership of any additional market value (which might be subsequently created in the business) might be agreed shared between the various ongoing stakeholders.

As external advisors, focused upon ensuring that the relevant business develops to become of a higher value – we can often help as ‘honest brokers’ (Copyright: Otto von Bismarck), in being able to put forward proposals & negotiate and / or mediate to put in place a revised stakeholder ownership structure for the next stages of the business’ development.

It would be naive of me to intimate that such negotiations and / or mediations revolve solely around the potential benefit (or ‘carrot’) elements of revising the structure, since all stakeholders need to be aware of the potential detriment (or ‘stick’) in not resolving their differences, and there may be a need for further ‘sticks’ to be ‘intimated’ to those who are reluctant to amend the structure.

Many film buffs will be familiar with the phrase ‘made them an offer they cannot refuse’ from Francis Ford Coppola’s original ‘The Godfather’ film (based upon the novel by Mario Puzo). When the phrase is first elucidated by ‘Michael’ (Al Pacino) to ‘Kay’ (Diane Keaton) in the opening wedding scene, it is used to graphically illustrate the forced re-negotiation of ‘Johnny Fontane’s (the - not unlike - Frank Sinatra character’s) management contract - with the band leader who held the benefit of the same:-

"So the next day, my father went to see him; only this time with Luca Brasi. An' within an hour, he signed a release, for a certified check for $1000. [Kay: "How'd he do that?"] My father made him an offer he couldn't refuse. [Kay: "What was that?"] Luca Brasi held a gun to his head and my father assured him that either his brains, or his signature, would be on the contract.

However, when you closely analyse the subsequent use of the phrase within the plot of ‘The Godfather’ [The Corleone family’s efforts to ‘win’ ‘Johnny Fontane’ a part in a forthcoming movie], you will come to (arguably) appreciate that if (say) the fictional Hollywood movie mogul had accepted Don Corleone’s lawyer’s / consigliore’s (‘Tom Hagan’ / Robert Duvall’s) offer on behalf of his client, for the minor ‘complication’ of conceding that ‘Johnny Fontane’ should appear in the mogul’s forthcoming picture, Don Corleone would make that film mogul's union problems ‘go away’ – to the likely overall benefit of the movie mogul.

It was (arguably) an excess of macho posturing and unwillingness to concede sensibly proposed arrangements which led to the horse’s head ending up in the movie mogul’s bed.

Thus ‘the offer [all stakeholder parties] cannot refuse’ needs to reflect a negotiated solution whereby all of the stakeholders (hopefully) do not lose (at least – not materially) and that they have an opportunity to ‘win-win’ in the future – which otherwise potentially or actually would not occur.
Put another way, if Francis Ford Coppola and Robert Duvall had managed to mutually satisfactorily resolve their actor’s fee negotiations for the final (and last) instalment of the film series (which they apparently failed to do), then the script for ‘The Godfather Part III’ would not have had to be completely rewritten - so as to remove the character ‘Tom Hagan’ (to the obvious detriment of the film and seemingly its financial success), and Robert Duvall might have put in a performance which would have won an Oscar (while finding his bank balance more than adequately filled - both for that and subsequent film performances).

We aim is to ensure that the legal processes involved in a potential transaction are an integral part of a successful project - with the aim of ensuring a smooth progression to the eventual transaction - so as to efficiently and economically take the interested party principals from initial discussions through to completion. Often that involves all stakeholders in non-adversarial negotiations and / or mediations prior to the transaction occurring, in which each party is led to a realisation that agreeing to a proposed universally satisfactory solution is in all parties’ long term best interests. Equitable principals of fairness and reasonableness are crucial to this process.

Finally, in the bastardised words of Tom Hagan (and so that you are in no doubt as to my love of ‘The Godfather’): –

“We have a special practice. We handle you as if we have one client. Now you have our number, we'll wait for your call.”

Simple Business Angel Investor Investment Heads of Terms - A First K.I.S.S.!

'Back to work' and 'across my desk' come instructions from a range of my business clients interested to explore prospectively accepting relatively modest cash sums for share based investments from business angel investors.

The common problem they seem to be experiencing is a reluctance upon the investor's part to commit (in principle), and without that commitment - the company seeking investment is reluctant to undertake the legal and administrative work necessary to prepare appropriate draft legal documentation with the aim of completing the share based investment (in a manner likely to be satisfactory to all interested parties).

The heads of terms set out below are designed to assist companies seeking investment by helping them to reach a 'subject to contract' commitment in principle from their prospective business angel investor(s).

Anyone desiring more detailed terms (particularly if you are - or represent - the prospective investor) should feel free to contact me - but sometimes, what's required is a first K.I.S.S. (= 'Keep It Simple Stupid'!)

Dan.Johnson@EquitableLaw.com / +44  (0) 7788 537 18

 

[INVESTEE COMPANY] LIMITED

(Company Number [XXXXXXXX])

Registered Office : [Address]

Trading Address : [Address]

[Name of Investor]
By Email

……… [September] 2014

Dear [Name of Investor],

Proposed investment of [X] Hundred Thousand Pounds (£[x]00,000) in the share capital of [Investee Company] Limited (Company) by way of subscription for ordinary shares in the share capital of the Company

Further to our recent discussions, these heads of terms set out the principal terms and conditions on, and subject to which an associated entity which you represent and whose details we would appreciate you clarifying by completing relevant details in due course (Investor) is willing to invest in the Company, subject to agreement and signing by all relevant parties of appropriate investment documentation.

For the avoidance of doubt, these heads of terms are not exhaustive and are not, and are not intended to be, legally binding except as specifically set out below.

1. INVESTMENT

1.1 The proposed investment (Investment) will be made on a basis which will represent (post investment) a [fifteen] per cent. ([15]%) equity shareholding for the Investor in the Company.

1.2 The Investment will be made in the form of ordinary shares which will the same rights as the other shares in the Company.

1.3 The Investment will be made in full at completion.

1.4 The Investment will be used for the Company's on-going working capital requirements (including such specific purposes as we may agree with you as part of the investment process).

2. CONDITIONS

The Investment is to be conditional upon us agreeing to such reasonable additional requirements in relation to aspects and issues as you may request of us as part of the investment process.

3. TERMS OF INVESTMENT

The Company and each of the existing shareholders (Founders) will agree to incorporate such additional terms as the Investor may reasonably require.

4. CONFIDENTIALITY

4.1 The matters contemplated by these heads of terms are to be treated as confidential and should not be disclosed to any person (except with the prior written consent of the other party).

4.2 The Investor undertakes that it will not disclose or make use of for its own benefit (or for the benefit of any associated person), any of the information of a confidential nature relating to the Company which has been disclosed to it during the course of the investment process or otherwise in connection with the proposed investment.

5. FEES AND EXPENSES

Each party shall bear its own costs incurred in connection with the proposed Investment.

6. EXPIRY OF OFFER

The offer set out in these heads of terms is open for acceptance until close of business on [Friday, 19th] [September] 2014, failing which it shall lapse.

7. GOVERNING LAW AND JURISDICTION

7.1 Paragraphs 4 to 7 are intended to be legally binding.

7.2 These heads of terms and any dispute or claim arising out of or in connection with them or their subject matter or formation (including non-contractual disputes or claims) shall be governed by and construed in accordance with the law of England and Wales.

Please sign and return a copy of these heads of terms as soon as possible to confirm your agreement to the above.

Yours faithfully
................................................................
[Full Name]
Director, Duly authorised for and on behalf of the Company and the Founders

We hereby acknowledge receipt and confirm our acceptance of the contents of these heads of terms

Signed .....................................................
Duly authorised for and on behalf of the Investor

Date ........................................................ 2014

Investor Details (for inclusion in the share register of the Company)

Full Name (Please PRINT) : ………………………………………………...

Correspondence Address :

………………………………………………….
………………………………………………….
………………………………………………….

Equitable Law Advises & Assists With The Purchase Of A Commercial Cleaning Business Saving Over 1000 Jobs

Equitable law recently assisted a buyer of a business (and related assets) of UK commercial cleaning company, Jani-King (GB) Limited, which had entered administration on 12th March 2014.

Jani-King (GB) Limited operated a commercial contract cleaning service to high profile hotel chains, restaurants and retail outlets across the UK.

Equitable Law assisted our client buyer with ensuring that the hotel cleaning focused elements of the business were successfully purchased, so as to be traded after the administration.

The administrators were legally advised and assisted by Squire Sanders' London office.

As is frequently the case with pre-packaged administration sale and purchase transactions, the necessary legal advice and assistance was required to be intensively undertaken in a very short time-scale - which Equitable Law was delighted to successfully achieve.

Further details are confidential, but the administrators (of Moorfields Corporate Recovery) made an announcement, available at :-

http://www.moorfieldscr.com/news/moorfields-complete-sale-commercial-cleaning-business-saving-over-1000-jobs/#.U4SnL3YuK3p

Should you wish to discuss our involvement with this transaction further, please feel free to contact :-

Dan.Johnson@EquitableLaw.com

Principal & Business Law Solicitor

U.K. Cellular Tel.  –  07788 537 187

www.EquitableLaw.com

The Private Office | 24 Bemish Road | London | SW15 1DG 

D.D. Tel. +44 (0) 20 8780 3319 | e-Fax. +44 (0) 871 264 9515

Understanding a Buyer's Legal Protection Processes

News | Understanding a Buyer’s Legal Protection Processes

In last month’s article I explained that as part of the Pre-Sale Process, the seller will generally want to provide limited information - presented in a format which is largely intended merely to whet the appetite of a prospective purchaser. As the sales process progresses, what legal protection will the buyer endeavour to obtain?

A well advised seller, as part of the legal process involved in a sale and purchase, will generally be successful in seeking not to be legally bound by most pre-sale statements regarding the business that might have been made to the prospective buyer.

Accordingly, while there remain transactions in which effectively a buyer merely hands over its offered purchase price and ‘hopes for the best’, because a seller will generally wish to elicit an offer from the buyer of as high a price as possible for the business being sold, it is generally the case that the seller agrees to give some element of comfort to the buyer as to the full worth of the business which the buyer proposes to purchase.

Two main legal processes have evolved - with the aim of giving the buyer comfort as to the worth of the business they are buying, and thereby allowing the buyer to offer more for the business than would be the case in a situation when the buyer is required to bear an element of risk as to the worth of the business it is buying.

The desired result should be to allow the respective parties to legally agree the ‘best deal’ that can be realistically achieved between them.

The Due Diligence Process

The first of these legal processes is known as ‘due diligence’.

This process broadly involves the buyer (prior to entering into a legally binding agreement) asking the seller a range of questions in relation to the prospective business which is proposed to be bought, followed by the seller both answering those questions (as fully and accurately as it can), and the seller producing supporting documentation (and any other evidence) to support the answers given to the questions asked.

The buyer will need to carefully consider the answers given and documentation (and other evidence) produced – so as to ensure that there are no perceived issues for the buyer with the business proposed to be bought – at the price proposed to be paid.

The Warranty and Indemnity Protection Process

The subsequent (although accompanying) process is known as ‘warranty and indemnity protection’.
Warranties and indemnities are a set of contractual statements and promises in relation to the business being bought, which the buyer asks the seller to make as part of the legal agreements.

At their simplest, warranties may effectively be a statement by the seller that they have fully and
accurately answered, and provided all documentation (and any other evidence) in response to the due diligence process.

Generally a buyer will ask for warranty protection in as all-encompassing a format as possible, and the seller will seek to qualify the requested warranty protections by way of a ‘disclosure letter’ - which seeks to set out the pertinent factual position – with the result that the buyer becomes fixed with knowledge of that factual position and loses their right to potential compensation in relation to matters which are disclosed to it.

Indemnities are a slightly different mechanism, by which (generally) a seller agrees to specifically compensate a buyer (usually) against the risk of a particular valuation issue occurring (e.g. a potential liability of the business actually arising in practise).

The Aims and Effects of Due Diligence and Warranty and Indemnity Protection

For the buyer, the process of undertaking due diligence and obtaining warranty and indemnity protection, allows it to gain some comfort and protection as to the worth of the business which it is proposing to acquire.

This in turn allows it to consider paying a full price for the assets, comfortable in the knowledge that it has reduced a certain element of the risk involved in the transaction.

The interested parties should be made aware (in early course) that it is highly likely that the due diligence process and the warranty and indemnity protection process will require them to devote considerable time and effort to achieving the desired outcome of achieving a maximum purchase price (for the seller) - and appropriate comfort and protection for the buyer, as to the business that they are buying.

Because Evolution Capital's aim is to ensure that the legal process is an integral part of the overall sale process – this should have the effect of ensuring a smooth progression of these legal processes as part of the overall transaction – and thereby efficiently and economically progress the interested parties from agreement in principle upon a transaction through to completion

Occasionally these legal processes bring to light (prior to a legal agreement being reached) a situation that is an issue for the buyer (and – in many cases – that the seller was not envisaging would be an issue for the buyer).

These legal processes allow buyer and seller to discuss the relevant problematic issue prior to entering into any legal agreement, and thereby to seek to resolve the issue by a number of possible approaches which can be taken (e.g. fuller explanation of a perceived issue by the seller to the buyer removing any concerns, adjustment to the sale and purchase price and / or a contractual agreement adjusting which party bears a risk of a potential liability crystallising – i.e. an indemnity etc.). The hoped for end result is a much fairer and more reasonable ‘deal’ with the ‘right’ sale and purchase price being agreed to be paid for a ‘correctly perceived’ business.

If notwithstanding these processes, the business which is transferred is not that which was indicated as part of the due diligence process, and as such position is contractually supported by the warranties and indemnities, then the buyer will generally have a potential contractual recourse against the seller for compensation pursuant to the terms of the sale and purchase agreement.

The warranties and indemnities in such circumstances can accordingly be considered to be a means to adjust the purchase price to the ‘right’ sale and purchase price which would have been paid, if the purchaser had been able to accurately understand the situation of the business that they were acquiring.

It is so as to hopefully avoid the necessity for such ‘post deal price adjustment discussions’ that the interested parties (and their advisers) should focus upon these legal processes as an absolutely crucial part of successfully achieving the completion of the transaction.

 

http://www.evolutioncapital.com/news-articles/understanding-a-buyers-legal-protection-processes#.U3M5TnZLrkY

The Legal Sale and Purchase Processes

Those involved in owning and running businesses often find that a major transaction (including a sale and purchase of a business) is a highly stressful time for them.
At a time when they already have responsibilities for successfully trading their underlying business – they find themselves needing to engage with transactional lawyers in what appear to be highly time-consuming legal processes, and whose aims may seem unclear.

This position can be particularly annoying, because it often seems to those involved, that the legal processes are delaying the completion of the transaction - which the interested party principles believe they have already agreed upon.

Evolution Capital's aim is to ensure that the legal process involved in a transaction is an integral part of the sale and purchase process - with the aim of ensuring a smooth progression of the overall transaction - so as to efficiently and economically take the interested party principles from initial discussions through to completion.

That aim is considerably assisted if the interested party principles have an opportunity to consider and understand why the legal elements of a sale process have evolved to be as they are.

The Pre-Sale Process

It is an accepted part of the marketing of a business for sale but those involved in the process on the ‘sell side’ will want to "keep their cards as close as possible to their chest". The seller will want to provide just enough information as is required so as to whet the appetite of the prospective purchaser, while not wishing to create any legal obligations – including any possible liabilities relating to its description of the business to the prospective buyer.

Unlike the legal protections which apply in (say) sale and purchase arrangements between retailers and consumers, there is very little protection generally afforded to a buyer of business assets under English law. This position is best noted in the relatively well-known English maxim of "Caveat Emptor"- or in more colloquial English – "Buyer Beware".

A buyer is generally entitled to redress for the effects of misrepresentations which may be made by a seller to the buyer with the aim of inducing a sale. However, if a seller of business assets is aware of an actual or potential problem with their business, they are generally fully entitled to stay silent upon that issue (i.e. there is no obligation to disclose the perceived problem to the prospective buyer).

The general position in English law, is that if a buyer purchases a "pig in a poke" – Or in more formal language, a business which is ‘not all that it was thought to be by the buyer’, then any recourse against the seller is likely to be severely limited. This will be particularly so because a well advised seller, as part of the legal process involved in the sale and purchase, will generally be successful in seeking not to be legally bound by most pre-sale statements regarding the business that it might have made to the prospective buyer, often as part of the process of the seller seeking to encourage the buyer to make a generous offer for the relevant business.

If this general position in English law is not addressed, then the likely result will be that the buyer is subject to some element of risk that the business which they are proposing buying is not worth what the buyer proposes paying for it. That element of risk would then generally need to be factored into the price that the buyer proposes paying – effectively by a reduction in the purchase price that the buyer might be minded to pay for the business, if it could satisfy itself that the business was all that the buyer believed it was.

Accordingly, while there remain transactions in which effectively a buyer merely hands over the offered purchase price and ‘hopes for the best’, because the seller would generally wish to elicit an offer from the buyer of as high a price as possible for the business being sold and purchased, it is generally the case that the seller agrees to give some element of comfort to the buyer as to the full worth of the business which the buyer proposes to purchase.

Two main legal processes, Due Diligence and a Warranty (and Indemnity) Protection Process, have evolved with the aim of giving the buyer comfort as to the worth of the business they are buying – and thereby allowing the buyer to offer more for the business than in a situation when the buyer is required to bear an element of risk as to the worth of the business it is buying.

Having given a general outline to the legal sales and purchase processes in next month’s article I will detail the two main legal buyer protection processes and describe the aims and potential effects to each party.

http://www.evolutioncapital.com/news-articles/the-legal-sale-and-purchase-processes#.U3M4UXZLrkZ

Business Sale and Purchase – The Legal Process – What's Involved and Why?

Those involved in owning and running businesses often find that a major transaction (including a sale and purchase of a business) is a highly time consuming (and consequentially stressful) time for them.

At a time when they already have responsibilities for successfully trading their underlying business – they find themselves needing to engage with transactional lawyers in what appear to be highly convoluted legal processes, whose aims may seem unclear.

This position can be particularly annoying, because it often seems to those involved, that the legal processes are delaying the completion of the transaction - which the interested party principles believe they have already agreed upon (and indeed have – in principle / ‘subject to contract’).

Equitable Law's aim is to ensure that the legal process involved in a transaction is an integral part of the sale and purchase process - with the aim of ensuring a smooth progression of the overall transaction - so as to efficiently and economically take the interested party principles from initial discussions through to a successful completion.

That aim is considerably assisted if the interested party principles have an opportunity to consider and understand why the legal elements of a sale process have evolved to be as they are.

The Pre-Sale Process

It is an accepted part of the marketing of a business for sale but those involved in the process on the ‘sell  side’ will want to "keep their cards as close as possible to their chest". 

The seller will want to provide just enough information as is required so as to whet the appetite of the prospective purchaser, while not wishing to create any legal obligations – including any potential liabilities relating to its description of the business to the prospective buyer.

Unlike the legal protections which apply in (say) sale and purchase arrangements between retailers and consumers, there is very little protection generally afforded to a buyer of business assets under English law. 

This position is best noted in the relatively well-known English maxim of "Caveat Emptor"- or in more colloquial English – "Buyer Beware". 

A buyer is generally entitled to redress for the effects of misrepresentations which may be made by a seller to the buyer with the aim of inducing a sale. 

However, if a seller of a business is aware of an actual (or potential) problem with their business, they are generally fully entitled to stay silent upon that issue (i.e. there is no obligation to disclose the perceived problem to the prospective buyer).    

The general position at English law, is that if a buyer purchases a "pig in a poke" – Or in more formal language, a business which is ‘not all that it was thought to be by the buyer’, then any potential for recourse against the seller is likely to be severely limited. 

This will be particularly so because a well advised seller, as part of the legal process involved in the sale and purchase, will generally be successful in seeking not to be legally bound by most pre-sale statements regarding the business that it might have made to the prospective buyer, often as part of the process of the seller seeking to encourage the buyer to make a generous offer for the relevant business (pursuant to ‘teasers’ which often comprise ‘pre-sale bluster’).

If this general position at English law is not addressed, then the likely result will be that the buyer is subject to some element of risk that the business which they are proposing buying is not worth what the buyer proposes paying for it. 

That element of risk would then generally need to be factored into the price that the buyer proposes paying – effectively by a reduction in the purchase price that the buyer might be minded to pay for the business, if it could satisfy itself that the business was all that the buyer believed it was.

Accordingly, while there remain transactions in which effectively a buyer merely hands over its offered purchase price and ‘hopes for the best’; generally - because the seller would generally wish to elicit an offer from the buyer of as high a price as possible for the business being sold and purchased, it is generally the case that the seller agrees to give some element of comfort to the buyer as to the full worth of the business which the buyer proposes to purchase.

Two main legal processes have evolved with the aim of giving the buyer comfort as to the worth of the business they are buying – and thereby allowing the buyer to offer more for the business than in a situation when the buyer is required to bear an element of risk as to the worth of the business it is buying.

The desired result should be to allow the respective parties to legally agree the ‘best deal’ that can be realistically achieved between them.

The Due Diligence Process

The first of these legal processes is known as ‘due diligence’. 

This process broadly involves the buyer (prior to entering into a legally binding agreement) asking the seller a range of questions in relation to the prospective business which is proposed to be bought, followed by the seller both answering those questions (as fully and accurately as it can), and the seller producing supporting documentation (and any other evidence) to support the answers given to the questions asked.

The buyer will need to carefully consider the answers given and documentation (and other evidence) produced – so as to ensure that there are no perceived issues for the buyer with business proposed to be bought.

The Warranty (and Indemnity) Protection Process

The subsequent (although accompanying) process is known as ‘warranty (and indemnity) protection’. 

Warranties (and indemnities) are a set of contractual statements (and promises) in relation to the business being bought, which the buyer asks the seller to make as part of the legal agreement(s). 

At their simplest, warranties (and indemnities) may effectively be a statement by the seller that they have fully and accurately answered, and provided all documentation (and any other evidence) in response to the due diligence process.

Generally a buyer will ask for warranty (and indemnity) protection in as all-encompassing a format as possible, and the seller will seek to qualify those requested warranty (and indemnity) protections by way of a disclosure letter which seeks to set out pertinent factual position – with the result that the buyer becomes fixed with knowledge of that factual position and loses their right to potential redress in relation to matters which are disclosed to it.

The Aims and Effects of Due Diligence and Warranty (and Indemnity) Protection

For the buyer, the process of undertaking due diligence and obtaining warranty (and indemnity) protection, allows it to gain some comfort and protection as to the worth of the business which it is proposing to acquire. 

This in turn allows it to consider paying a full price for the assets, comfortable in the knowledge that it has reduced a certain element of the risk involved in the transaction.

The interested party principles should be made aware (in early course) that it is highly likely that the due diligence process and the warranty and indemnity protection process will require them to devote considerable time and effort to achieving the desired outcome of the maximum achievable purchase price (for the seller) and comfort and protection for the buyer as to the business that they are buying (thus allowing them to offer such a purchase price).

Because Equitable Law's aim is to ensure that the legal process is an integral part of the overall sale process – this should have the effect of ensuring a smooth progression of the these legal processes as part of the overall transaction – and thereby efficiently and economically progress the interested party principles from agreement in principle upon a transaction through to a successful completion

Occasionally these legal processes bring to light (prior to a legal agreement being reached) a situation that is an issue for the buyer (and – in many cases – that the seller was not envisaging would be an issue for the buyer).  These legal processes allow buyer and seller to discuss the relevant problematic issue prior to entering into any legal agreement and thereby to seek to resolve the issue by any number of possible negotiated approaches which can be taken (e.g. adjustment to the proposed sale and purchase price, contractual adjustment of which party bears a risk of a potential liability crystallising etc.).  The hoped for end result is a much fairer and more reasonable ‘deal’ with the ‘right’ sale and purchase price being paid for a ‘correctly perceived’ business.          

If notwithstanding these processes, the business which is transferred is not that which was indicated as part of the due diligence process, and as such position is contractually supported by the warranties (and indemnities), then the buyer will generally have a potential contractual recourse against the seller pursuant to the terms of the sale and purchase agreement.  

The warranties (and indemnities) in such circumstances can accordingly be considered to be a means to adjust the purchase price to the ‘right’ sale and purchase price which would have been paid, if the buyer had been able to accurately understand the situation of the business that they were acquiring.

It is so as to hopefully avoid the necessity for such ‘post deal price adjustment discussions’ that the interested party principles (and their advisors) should focus upon these legal processes as an absolutely crucial part of successfully achieving the completion of the transaction.

    

March 2014

DanielRobertJohnson     (Skype – V.o.I.P. & I.M.)

Dan.Johnson@EquitableLaw.com

Principal & Business Law Solicitor

+44 (0) 7788 537 187     (U.K. Cellular / Mobile Tel. – Inc. ‘Facetime’)