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.
DanielRobertJohnson (Skype
– V.o.I.P. & I.M.)
Principal & Business Law Solicitor
+44 (0) 7788 537 187 (U.K.
Cellular / Mobile Tel. – Inc. ‘Facetime’)
