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Share Sale
• Ownership of Business doesn’t change
• Ownership of Company changes


Buyer Shareholders



Business/Asset Sale Business

• Ownership of Business
• Ownership of Company
doesn’t change

Buyer Company


Transfer of a business in return for shares

• S.162 TCGA 1992 – rolling gains into the price of shares
o All assets must be transferred as going concern i.e. if mere acquisition of assets then the relief would not be available
• S.386 Income and Corporation Taxes Act 1968
o Where bought wholly or mainly in return for shares, former proprietors can carry forward unutilised trading losses
against income received from the company
o If not bought wholly/mainly i.e. mere acquisition of assets then this relief is not available

• If transfer of going concern then VAT doesn’t apply to transfer – Art 5 VAT (Special Provisions) Order 1995
• If simply assets, then this is a supply of goods/services and would attract VAT

Asset sales
• Transfer of Undertakings (Protection of Employment) regulations 2006 doesn’t normally apply whereas they would if sold as
going concern
• If TUPE doesn’t apply (which it won’t if only assets transferring) then common law rule applies which means:
o If seller redeploys employees then OK
o If doesn’t then contracts terminated and seller liable to employees i.e wrongful /unfair dismissal

Sale of a economic entity

• Where selling enough assets to constitute being sold as going concern TUPE automatically transfers employee contracts to the
Comparison between share sales and business sales - Seller
Due diligence required
• Business
o Buyer will pick and choose assets so level of due diligence far less
• Shares
o Buyer likely to be more concerned on a share sale since acquiring all actual and hidden assets and liabilities
 More time consuming
 More expensive
 More disruptive

Clean break from business – KEY THING FOR SELLER

• Shares
o Clean break
o Seller loses connection with company
 Though not entirely since buyer will demand wider warranties and indemnities
 Seller will need to negotiate releases from any guarantee obligations such as personal indemnties
o Buyer now owns company and its liabilities
• Business (Assets to constitute going concern)
o No clean break
o Shareholders continue to own company
o Liabilities still owed by the seller to third parties
 Possible for indemnities and guarantees to have been given between seller and buyer

Scope of warranties
• Likely to be wider on a share sale
• On a business sale all contingent tax liabilities will remain with seller so no such warranties needed
• Investigation into affairs more rigorous on a share sale

Transfer of title
• Shares
o Simple stock transfer form
o Pre-contract investigation will be more rigorous
• Business (Assets to constitute going concern)
o Each separate asset must be individually transferred
o Complications
 Landlord consents to assignment
 Delivery of assets
 Transfer of intellectual property rights

Restrictions in the FSMA 2000

• Shares
o More onerous than business sale
o s.21 restricts ‘invitation or inducement to engage in investment activity’
 ‘investment activity’ includes shares but not a business
o Solicitors giving advice must also comply with regulated activity regulations which is wide enough to include a solicitor
acting in acquisition of shares
• Business (Assets to constitute going concern)
o Though less onerous, decision to sell business may come at late stage in negotiations so FSMA may have been needed to
be complied with up to that stage

• Shares
o No change of employer since target company is employer before and after change of control
o Seller no longer has direct interest/liability except in relation to warranties given to the buyer in the acquisition
• Business (Assets to constitute going concern)
o Responsibility passes to the buyer under Transfer of Undertakings (Protection of Employment) regulations 2006
o NB - If just a few assets and not a going concern then TUPE won’t apply and seller remains liable

Taxation factors
• Shares: direct receipt of consideration
o Sale of shares makes shareholder liable to CGT
o Seller may benefit from the ‘disposing of substantial shareholding exemption’ under TCGA 1992 if:
 - both the Seller and the company in which the shares are being sold (i.e. the subsidiary of the seller) are trading
companies, AND
 - the Seller has held at least 10% of the shares of the company being sold for continuous period of at least 12
months in previous 2 years
• Business: two tier taxation (Assets to constitute going concern)
o (1) Selling company suffers Corporation tax on sale of business
 Disposal of capital assets may give rise to chargeable gain
 If assets sold for more than written down value this may result in positive balancing charge which are treated as
income receipts
o (2) Charge when proceeds of sale (after tax) are distributed to shareholders; EITHER:
 If net proceeds distributed on a winding up then shareholders are effectively making a chargeable disposal for
CGT purposes; OR
 If a dividend is declared then the shareholders will pay income tax under ITTOA 2005 Pt 4 on the dividend
(less any credit)

Reinvesting the proceeds

• Shares: Individual sellers
o Not qualifying assets; HOWEVER
o If individual seller reinvests gain from sale of shares into Enterprise Investment Scheme (EIS) then can claim deferral
• Shares: Corporate sellers
o Deferral relief not possible
o May benefit from exemption if disposing of substantial shareholding in trading company
• Business (Assets to constitute going concern)
o Roll over relief on replacement with qualifying assets – s.152 TCGA 1992
Comparison between share sales and business sales – Buyer
Due diligence required
• Business
o Can pick and choose assets to level of due diligence far less
• Shares
o Likely to be far greater on a share sale since acquiring all actual and hidden assets and liabilities
 More time consuming
 More expensive
 More disruptive


• Business (Assets to constitute going concern)
o Benefit of existing contracts will not automatically pass
o Terms of contracts may require consent of 3rd party for assignment of benefit to be effective
 3rd party may not grant assignment
 May be ‘change of control’ clause
 May not be possible to assign both benefit and burden of contracts
• Seller may require buyer to give indemnities re: costs/future risks if burden cannot be assigned
o Consent of landlord if assigning a lease
 Delays – often reason that contract and completion don’t happen simultaneously
o Insurance to be transferred or new insurance arranged
• Shares
o None of above worries since assets and outstanding contracts remain unaffected
o 2 considerations:
 (1) no guarantee of non-contracted third parties continuing to deal with company after changeover
 (2) May be change of control clause which allows 3rd party to terminate their agreement should company
change hands

Choice of assets and liabilities

• Assets
o Shares
 All underlying assets, good and bad, are transferred on share sale
o Business (Assets to constitute going concern)
 Can pick and choose assets so no need to acquire surplus machinery, for example
• But need to ensure acquire enough to constitute a ‘going concern’/business
• Liabilities
o Shares
 All liabilities, hidden and otherwise, become responsibility of the buyer
• Warranties and indemnities may not be enough to fully protect
 Also picking up the tax history of the Company
• Will want a ‘Tax Deed’ from seller indemnifying against all pre-contract tax liability
o Business (Assets to constitute going concern)
 Buyer only liable for matters it agrees to take responsibility of in acquisition agreement

Financial Assistance
• s.151 CA85 – prevents company giving financial assistance in acquiring shares in the company
o Business (Assets to constitute going concern)
 If using part loan to acquire, buyer can offer assets of company as security
o Shares
 Cannot offer assets as security as this would be granting indirect assistance to buyer

Taxation factors – mostly to do with business transfer

• Base costs for CGT
o Business (Assets to constitute going concern)
 Chargeable assets such as land with have higher base cost for Capital tax purposes
• Can be good and bad depending on whether value of asset goes up or down
o Shares
 Buyer of shares will be liable to greater increase since they pay on the original costs of acquisition by the
company i.e. the buyer actually only acquired the shares at a value of £2 and is now selling for £3 but the
original company bought/created the shares for £1 and so the gain is the increase from £1-£3 and not £2-£3
• Deferred tax liability
o Buyer should seek discount on price of shares if is intending to dispose of them imminently
• Capital allowances
o Business (Assets to constitute going concern)
 On a business acquisition the buyer will benefit from capital allowances (writing down allowance)
• Apportionment of the purchase consideration
o Business (Assets to constitute going concern)
 Apportionment between assets on fair basis but should weight in favour of (i.e. give higher price to):
• Plant and machinery – writing down allowance
• Trading stock – deduction against income profits
• Capital items qualifying for roll-over relief on replacement of qualifying business assets
 Apportionment is matter of negotiation with seller
• High plant and machinery or stock price may result in seller having to pay tax on balancing charge
• Preserving tax losses
o Shares
 s.393 ICTA allows carrying forward of trading losses to be set against future trading profits
 tax identity of company remains the same so this is possible
o Business (Assets to constitute going concern)
 Identity of company changes so cannot make use of s.393
o Shares
 not normally chargeable on sale as going concern - Art 5 VAT (Special Provisions) Order 1995
o Business (Assets to constitute going concern)
 VAT payable on the individual assets but not where as going concern Art 5 VAT (Special Provisions) Order
• Stamp duty
o Shares
 0.5% to nearest £5
o Business (Assets to constitute going concern)
 Payable on land and shares
 Land rates:
• <£125,000 (<£150,000 for commercial property) – No Tax Payable
• >£125,000 <£250,000 – 1% of purchase price
• >£250,000 <£500,000 – 3% of purchase price
• >£500,000 – 4% of purchase price

Ease of integration
• Dependent on the facts

Hive-down: A compromise
1. Target company sells some/all of its assets to new company (“Newco”)set up as wholly owned subsidiary of target company
2. Buyer acquires all shares of Newco
3. Target sells all shares in Newco to buyer
Heads of agreement/Letter of intent
• Key issues that have been agreed on following negotiation
• Provides focus for process of transaction
• Presumption of intent to create legal relations as are 2 commercial parties BUT unlikely to be binding:
o Paragraph at end of heads stating “these heads of terms are not intended to create legal relations except in the case of
provisions 1, 2, 3….”
o Marked as ‘subject to contract’
 Heads normally marked ‘subject to contract’
 Heads normally precede detailed investigation into the target company
 Some heads will be binding and this must be expressly stated to be the case
o Exclusivity
 Of negotiation and right to buy company for specific period for named buyer
 Enforceable provided is sufficiently certain (Walford v Miles [1992])
• Doubt cast by Court of Appeal which said lock-out agreement is no more than agreement to negotiate
 CAN make a lock-out = seller will not talk to anyone else except buyer for specified period
• Must specify time limit
 CANNOT make a lock-in = seller will only talk to the buyer
**THINGS TO CHECK IN THE EXAMS Re: Heads of Terms ***
1. Parties
a. Is/Are letter/heads addressed to correct party i.e. the seller, not the company they are selling?
i. If a share sale:
1. Should be addressed to Shareholders
2. Should identify all shareholders as party to the contract
ii. If business sale
1. Should be addressed to the Company
2. Consideration
a. Is it the correct value?
b. Is it the correct form?
c. If no value or form of consideration given in facts – suggest checking with client as to amount and type to be paid
3. Has it been marked subject to contract somewhere?
a. Or expressed to “not be legally binding”
4. Have parts that are intended to be legally binding been expressly stated as such:
a. Confidentiality
i. Include exceptions such as info in public domain, Information provided by either party to its professional
advisors in connection with the sale and purchase, information required to be disclosed to third party
authorities by law/regulation
b. Fees
i. Who should be responsible if acquisition doesn’t complete?
1. Each party for own costs?
5. Have all key terms been included
a. Provision for conditional on approval of change of control/assignment – NB – if acting for seller then don’t worry
about this as not in client’s interest
6. Must be a provision for disclosure to cover the warranties made
7. Should not be provision for “full due diligence”
a. Delete “full” and use only due diligence since full would allow buyer carte blanche access to the business,
employees etc which is very onerous for seller
8. Make sure all terms are clear, certain and/or defined
a. “Senior managers” – who are these i.e. have they been identified in the facts already?
9. Are there any provisions which were not agreed or intended?
a. Non compete clause which was not discussed/intended/relevant
10. Are any clauses void for lack of certainty or simply void?
a. Cannot have lock-in clause; only lock-out allowed
11. Are all clauses reasonable?
a. Where either party liable for fees/costs as a result of their breach, should be expressed to be all “reasonable
costs/fees not exceeding X”
12. Are clauses reciprocal?
a. Where seller will be liable in fees to buyer for a breach, make sure buyer has similar obligation should they breach
13. Include a confidentiality clause
14. Ensure Heads are not legally binding:
a. “There is not intention by either party to create legal relations except in relation to provisions 1,2,3, etc”

Due Diligence
• Buyer should acquire as much info about target company as possible
o Value
o Liabilities
o assets
• Solicitor should cooperate by answering all questions fully and quickly as time will be a factor

Confidentiality agreement
• Either stand-alone or as part of Heads of Terms
• Seller may be unwilling to pass certain sensitive info before unconditional exchange of contracts
o Will depend on facts
• Both buyer and/or seller may wish to keep entire deal and discussions secret to last minute
• Where seller prepared to pass some info, should make buyer enter into confidentiality agreement containing some or all of
o Definition of confidential information (excluding info in public domain or already known to proposed buyer)
o Obligation on buyer not, without seller consent, to disclose or use such information except for authorised purposes (as
 List of authorised persons to receive such info
 May prevent buyer from soliciting customers, suppliers or employees of target for specified period
• Must be careful that doesn’t amount to restraint of trade
o Undertaking from buyer to destroy such info if acquisition doesn’t proceed
o Agreement that neither party, without consent from other, will make announcement that negotiations are taking place
• May be in formal agreement or in letter to seller
Acquisition agreement (‘Sale and Purchase’/’S&P’)
• Parties agree to transfer title to shares or assets
• Complexity comes from protections sought by buyer in form of warranties and indemnities from seller
• Buyer’s solicitor drafts first copy then seller’s makes amendments
• Usually simultaneous with completion stage
o If not (waiting for consents, licenses to assign etc) then will be a conditional contract

Disclosure letter
• ALWAYS have one – these go hand in hand with warranties
• Prepared by seller’s solicitor
• Linked to acquisition agreement
• Disclosure of info which, to withhold, would put seller in breach of warranties (being given in agreement)
o WHAT: Seller attaches relevant docs etc – ‘the disclosure bundle’
o WHY: Done to prevent buyer bringing breach of warranty claim
 May negotiate lower price/ask for indemnities
• If actually written by solicitor should include disclaimer that all info provided by client and solicitor accepts no responsibility for
• Should also send draft copy to opponent solicitor first
• Hand over at same time as acquisition agreement

Negotiations and drafting process

1. Buyer’s solicitor prepares draft acquisition agreement
a. Submits to client for approval
2. Buyer’s solicitor forwards to Seller’s solicitor
3. Seller’s solicitor consults with client and makes amendments
4. Returns to Buyer’s solicitor
5. Seller’s solicitor prepares draft disclosure letter
a. Submits to client for approval
6. Seller’s solicitor forwards to Buyer’s solicitor

Potentially many drafts of each are exchanged

7. Seller’s and buyer’s solicitors agree final versions of both Disclosure letter and Acquisition agreement
Pre-completion – don’t always have this stage since contract and completion are usually simultaneous
• Ideally completion will take place immediately after acquisition agreement signed but often is a gap
o Where parties enter into agreement conditional on the happening of a certain event
• During this period parties will ensure conditions are met and maybe repeat searches made in due diligence process

• Share sale
o Seller’s solicitor hands over signed share transfer forms
o Completion board meeting of target company to deal with:
 Resignations of directors
 Appointment of directors
 Approval of share transfers
 Board meeting minutes (referred to in acquisition meeting as ‘in the agreed form’ and annexed to the
o Method of completion normally included as clause in acquisition agreement

• Business sale
o Title formally transferred in return for purchase price
o Any land must be transferred by deed (assignment, transfer or conveyance as appropriate)
o Machinery etc transferred on delivery
o Goodwill and benefit of contracts may also need assigning
o No formal documentation needed to pass machinery etc since transfer is on delivery
• Share sale
o Ensure:
 stock transfer forms stamped
 internal registers updated to reflect, for example, change in members and directors
 appropriate info filed at CH
• Business
o Where involves transfer of land will ensure appropriate registrations made at HMLR or Land Charges Department
• Both
o Integration of the business/assets into the buyer’s own

Not necessary if
can exchange and
though if this is
the case, repeat
searches should
be carried out
prior to stage 2
Compliance with the FSMA 2000

The basic restriction

• s.21 FSMA 2000 – criminal offence for any person other than an authorised person to “communicate an invitation or inducement
to engage in investment activity” unless contents approved by an authorised person
o Any agreement entered into following invitation in breach is rendered unenforceable, though court can allow it in
certain circumstances

What sort of activities are covered by the restriction?

• Invitation or inducement to enter into negotiation for acquisition of shares in target company

Regulated activities
• If involved, must obtain authorisation from FSA
• Activities involving defined financial matters as standalone service
• Advising and arranging share purchase is regulated activity – s.22 FSMA 2000
• Takeover Exclusion:
o where will result in buyer owning 50% or more of company’s voting shares; OR
o buyer obtains day to day control of the company’s affairs
• Most solicitors firms fall within the exception since they are unlikely to be offering standalone financial advice


1. FSMA doesn’t apply to an asset sale

2. FSMA does apply to a share sale
o Criminal to breach FSMA
o Contract will be unenforceable


o Will be exempt if:

 Control transferred (takeover exclusion); OR
 Authorised
1. Keep the information obtained through DD confidential
2. Keep fact that company is up for sale a secret to avoid disruption of the market
3. need a written agreement to make certain of confidentiality obligations
a. law only protects against “taking unfair advantage”
4. Allows seller to give information frankly and freely without worrying that buyer may release/misuse information
5. Will calm worries about the buyer possibly soliciting employees

• Doesn’t eliminate threat of release/misuse of confidential information
a. helps but doesn’t guarantee

How else can comfort be given to the seller?

1. Manage and monitor the DD procedure
a. secure systems in place to keep track of what info is passed to buyer
b. copies kept and indexed of all docs passed to buyer (evidence to prove you gave certain info)
i. discharge liability
ii. use as evidence in claim if want to claim buyer used info that could only have been obtained from a confidential
2. May not be suitable to give out specific docs
3. Particularly sensitive information:
a. wait until late in the transaction to show the buyer the doc
b. cross out sensitive parts of the doc with a marker (then show full doc later)
c. use a data room (actual room or copy-protected CD-rom)
i. all indexed docs in one place, controlled by seller and buyer invited to look, possibly take copies…
4. Seller’s protocols re:
a. how information may be used
b. who can have access to the documents (buyer will want certain advisers to be able to see some)
c. may have to abide by confidentiality agreements between itself and suppliers/customers so possible that won’t be able to
release doc at all
d. protection from seller’s staff accidentally coming across info

• Injunction stopping buyer doing what it wants
a. need to monitor how info being used
b. difficult to know of breach until it happens and then it is too late (once in public domain there is nothing that can be
• Damages
a. difficult as need to prove:
1. breach
2. loss resulting from that breach
1. Investigation of target
a. composition
b. operations
c. value
d. contracts etc
2. check company is actually worth what it is valued at
a. may ask for reductions in price as result of the DD process
b. may need indemnities and warranties as to values of assets etc
3. can target be integrated with buyer’s existing operations?

***Seller must monitor what docs it gives the buyer***

Scope and limitations

Type of acquisition
• Share Sale
o More extensive because acquiring all assets and liabilities (actual or contingent, fixed or unquantified)
o All aspects of the company will ideally be checked, not just that seller has title to shares
• Business Sale
o Doesn’t assume liabilities (except as regards employees under TUPE)
o Though buyer will often give indemnities in the SPA to seller as regards some liabilities so will direct investigation
 Which assets it wants
 Which liabilities it is prepared to accept
o NB – goodwill may be affected, even if it doesn’t accept some of the liabilities
o Information acquired will be used after conclusion of process to help buyer integrate entity into existing business

Size of company
• smaller then likely to be fewer docs to conduct DD on

Time constraints
• Commercial transactions often kept to overly tight time limits which will constrain

Financial resources and manpower

• Buyer may not be able to commit large chunk of budget and resources to the process (may be a false economy in the long term)

• Seller may wish to keep sale secret even from its workforce which will limit scope of DD
o All comms through one person
o Code-name for communications
o Reasons for visits to premises not disclosed
• Seller may be reluctant to pass on customer lists
o Confidentiality agreement can remedy this

Link with contractual protection

• If conducts full investigation, seller may be less willing to give indemnities; BUT
• Buyer will not want to forego indemnities as result of conducting full investigation

Familiarity with target

• if already know target and/or market well then less DD may be necessary


1. Accountant’s report (commissioned by buyer)
2. Due diligence letter/questionnaire (enquiries before contract)
3. Search file at Companies House
4. Check internal registers
5. See credit reports
6. Check title to property at the Land Registry

Environmental matters
The environmental problem in acquisitions
• Buyer will not know nature and extent of environmental liabilities
o More problematic for share acquisition where taking on all past liabilities (subject to indemnities)

The legislation
• Environmental Protection Act 1990 (EPA 1990) as amended by Environment Act 1995
• EPA 1990 introduced Integrated Pollution Control to regulate discharges from processes involving fuel, power, metals, minerals,
waste and chemicals into the environment
• License is required for business to conduct a prescribed process
o Prescribed Processes
• Part A
• Full IPC license required (covers all discharges from process into environmental medium)
• Part B
• License covering air emissions only is required (LAAPC license)
• May need further authorisation, depending on circumstances
• Licenses often have conditions attached, e.g:
o BATNEEC – Best Available Techniques Not Entailing Excessive Cost are used to minimise harm to environment –
EPA 1990 s.7
• Part II EPA 1990 – system for regulating waste management
o License required again (covers deposit of controlled waste on land and treatment, keeping or disposal of controlled

• Water Resources Act 1991 – license required if process involves discharge of polluting water into water courses
• Water Industry Act 1991 – consent needed before trade effluents discharged into public sewers
Continuing liability
• Seller will remain liable until the Environment Authority accepts the surrender of the licence
o it won’t do this until it is satisfied that the condition of the land and operation of the site is satisfactory
• licences are transferable but only if the EA deems the transferee fit and proper


1. What is the issue?
2. Why is it a problem?
3. What should we ask the seller?
4. How can this problem be resolved?
a. rectify what was missed/not done earlier?
b. indemnities?
c. warranties?
Accountants’ investigation and report
Nature and purpose
• Buyer will instruct through letter of engagement (often drafter by the accountants after meeting with buyer)
o if buyer is a company then auditors will likely be used
• Central to negotiations between buyer and seller
o Particularly in regard of warranties and indemnities
• Early meeting between buyer’s solicitors and the accountants to:
o Define areas of responsibility
o Avoid duplication
o Determine timetable for report

Matters covered by the report

Commercial activities
• Details of past, present and planned activities of the target
• Analysis of market in which target operates and description of:
o main customers
o geographical coverage
o market share
o principal competitors
• Details of:
o pricing policy
o terms of trade (incl. credit arrangements)
o significant agreements with suppliers, customers, agents

Management structure and employees

• Structure, details of:
o Ages
o Qualifications
o Service records

of directors and senior management

• Details of service contracts of directors and senior management including:
o Remuneration
o Commission
o fringe benefits
o pensions
o profit sharing
o share option schemes etc
• Number of other employees broken down into departments and locations and details of pay structure and staff relations
• Staff training schemes and recruitment policies

• Current tax position of target including:
o Current tax liabilities
o Adequacy of provisions for tax in accounts of target
o VAT and PAYE compliance
o Whether affairs up to date
• Effect acquisition will have on tax affairs of target and buyer (will transaction create any charges to tax)
• Likely future tax position of target
• Warranties and indemnities that should be obtained

• Aim: get breakdown of :
o Turnover
o Overheads
o Profit
o Trends
• Look at previous 3 or 4 accounting periods; AND
• Any unaudited information that may be available

Balance sheet strength (assets and liabilities)

• Long and short term borrowing commitments
o Details of any securities provided
• Recent capital expenditure, outstanding capital commitments, long-term contract and contingent liabilities
• Debtors and provision for bad debts
• Insurance policies (and adequacy of cover)

Accounting systems and policies

• Will assist buyer in understanding the accounts and determining whether changes will be necessary after completion

• What
• Where
• Tenure

Use of the report

• Final section of report:
o Strengths of company
o Weaknesses of company
o Recommendations and conclusions on reasonableness of price
• Seller sometimes given a copy through final section will be omitted
• Seller’s disclosure letter may deem matters in report disclosed and may request warranty or indemnity from buyer as to accuracy
of the report
• Buyer will have claim against accountants/auditor if report negligently prepared (contract – RS&C and tort – Neg Mis)
• Buyer will have no remedy against it’s auditors if it doesn’t commission own report and merely relies upon accounts of target
Enquiries before contract
The request
• Due Diligence questionnaire sent to seller’s solicitor
• Solicitor should liaise with other of the advisers to buyer to avoid duplicating requests for information
o Solicitor acts as ‘information contorller’
• Tailored to particular business
• Thought given to:
o Typical risks inherent in market in which target operates

The replies
• Provided there is confidentiality agreement, management should give full and frank replies
• Buyer’s solicitor and team should check replies and follow up with any further queries
• Answers will have impact on warranties and indemnities

Nature of information required

Contracts fundamental to the business
• Will be required by the buyer
• Buyer should check them to see whether consents to assign are required are whether there are restrictions
• Check whether any ‘change of control’ clause if share acquisition
• Possible fundamental contracts:
o Long term supplier-contracts (supplying target’s goods/service to public)
o Distributions and agency agreements
o Contracts for supply of raw materials to target
o IP licences
o Service contracts for key staff
o Leases for important plant/machinery
• Check which are due to end soon and investigate possibility of renewal
o Again, check for ‘change of control’ clause
• Check all properly executed and don’t contain provisions infringing EC or UK Competition laws
• Must be satisfied of terms of contracts and any provisions on early termination

• Business Acquisition:
o Any assets subject to charge?
 Either:
• Remove on completion; OR
• Consent of chargee for asset to be transferred subject to charge
• Share acquisition
o Request copies of all loan docs
 Any loans repayable on demand?
 Any loans immediately repayable on change of control?
 Must be confident of securing funds elsewhere if need be
o Has seller guaranteed any obligations of the target?
 Buyer will likely have to given indemnity to seller and/or pledge to owner of guarantee
o Where target is part of group:
 Buyer should insist any guarantees made in respect of other members of the group do not continue until
after completion
Intellectual property
• What rights are being acquired?
• Are they adequately protected?
• Will change of control affect protections?
• Details of computer systems and software used by target
• Business Acquisition:
o Buyer may need to renegotiate licenses
• Possibly instruct patent agent to conduct patent search and enquire at UK IP Office that target’s patents are valid and not
infringing any other patents

Rights triggered by a change of control (examples)

• Directors’ ‘golden parachute’ clauses
• Employees’ rights to buy shares at favourable price under share option scheme

Non-arm’s length trading relationships

• Target may have favourable trading and supply relationships with other members of group
• Investigate – they are unlikely to continue after acquisition
• If they do have such relationship, investigations into profits etc may not be indicative of past and future performance

• Request audited accounts for previous 3 years
• Any recently produced management accounts
• Then consider whether any warranties or indemnities are required

Other information
• Employees
• Pensions schemes
• Environmental matters
• Property
• Taxation
• Constitutional matters
Searching the file at the Companies registry
The search
• Quick and inexpensive way to obtain similar info on company
• Repeat shortly before entering into main agreement/completion
• Search against name of seller company (even if buying one of their subsidiaries)
• Limitations:
o Information cannot be wholly relied upon
o Burden on target to file such info and is liable to fines on default; BUT
 No provision for compensating a 3rd party who suffers loss as result of inaccurate information

Contents of file
Memo and articles
• Check that there is a power for company to dispose of business and that directors have that power
• Check what steps will be taken on completion e.g. in relation to completion BM
• Any restrictions on transfer of shares?
o Not allowed for admission to listing

Directors and shareholders

• To ensure correct persons are entering into agreement
• To decide what arrangements to enter into with directors on completion
• Annual return will reveal what other directorships (if any) the directors hold
o May be important if any of those other companies have been trading with the target

• Business acquisition:
o Any charges over assets being transferred?
 Buyer will insist on release upon completion
• Share acquisition
o How far has target charged assets as security for loans?
o Care must be taken since may have recently created a charge and not yet registered it so it won’t show up, yet will
still be valid against a purchaser

• Limited value
o may not include last set of audited accounts which need not be filed for 10months after ARP
o May be in abbreviated form if SME
• Will want to see any recent management accounts

Insolvency procedures
• May reveal that target is in liquidation, receivership or administration
Internal registers
• Statutory books and others
• Register of members
• Minute book
• Allotments and transfers of shares carried out in accordance with statute (ss.80 and 89 CA85) and articles of company
Credit Reports
• Another way of obtaining reliable financial information re:
o Average debt collection
o Payment periods
o Company’s liquidity

Checking the solvency of the seller

• Bankruptcy search at Land Charges Department immediately before completion
• Telephone call to Central registry of winding-up petitions
• Transactions entered into after commencement of winding up would be void

Property matters
Scope of investigation
• Not always possible to carry out full investigation (structural survey, title etc) since may alert employees etc
• Risk to buyer depends on importance of properties
• Other than full investigation, buyer could obtain protection by:
o Certificate of title given by seller’s solicitor; AND/OR
o Property warranties given by seller in acquisition agreement

Certificate of title
• Seller’s solicitor will have to carry out investigation of title before giving certificate
• Chief certification sought:
o Property has good and marketable title
• Schedule to Certificate will give:
o Description including title number and class of title and summary terms of any leases
o Statement that not subject to any specified encumbrances except as set out in certificate
• Precise format and wording up for negotiation
• Buyer will want to know on what information the certificate is based
• Buyer can sue seller’s solicitor if negligently prepared
o Unless mistake as result of info provided by client and where certificate makes it clear that all statements based on
info provided by client

Property warranties (examples)

• Company has good title and possession/control of all deeds and docs necessary to prove
• Each is free from any mortgage, charge, lien or other encumbrance
• Current use complies with TCPO and all planning and building regulations/consents
• Obligations, restrictions, conditions and covenants all observed and performed and no notice of breach served
• Vacant possession
• No outstanding disputes, orders, notices or demands by local or other authority
• In good and substantial repair and fit for purpose currently used
• Free from notice, inhibition, caution, land charge or local land charge not of general application to that area

• Seller can qualify warranties by making disclosures in the usual way

Form of investigation
• Physical inspection particularly important
o Have repairing obligations been complied with?
• Valuation will allow buyer to compare with values given in the accounts of the target
• Full structural survey ideal but often not feasible

Landlord’s consents
• Business acquisition
o Consent to assign leasehold premises likely needed
• Share acquisition
o Consent may also be needed if assignment is defined in the lease as change in control of the tenant company
• Has seller guaranteed lease obligations?
o Seller will likely ask for undertaking from buyer to use best endeavours to obtain release for seller from obligations
and an indemnity to them until such time as this is achieved

Original tenants of leasehold property

• Pre 1st Jan 1996 – seller will remain liable
• Post 1st Jan 1996 – release from liability but may need to give Authorised Guarantee Agreement and thus remain liable
Problems of investigation on a share purchase
• Searches do not give buyer of shares same protection since protection is given to a ‘buyer of land’

When does the Act apply?

• s.23(1) states it:
o applies to any tenancy where property is or includes premises which are occupied by the tenant and are so occupied for
the purpose of a business carried on by him or for those and other purposes

There must be a tenancy

1. Definition includes agreement for lease and underlease
2. License is not enough
3. Basic position = held to be lease if:
a. given exclusive possession
b. for fixed period
c. at a rent

The premises must be occupied by the T

1. Question of fact
2. Can be occupied personally or by agent/manager/company owned by T
3. Sub-Tenant can benefit from the rights if they are in occupation
4. Both T and sub-T can benefit where sub-lease of part

Occupied for business purposes

1. Trade, profession or employment
2. In case of body of persons – any activity carried on by them i.e. running a tennis club
3. Business purpose only needs to be main purpose, need not be sole purpose

Excluded tenancies
1. Tenancies at will
2. Fixed term tenancies not exceeding 6 months
a. Usually cannot grant succession of 6 month contracts to circumvent the contract
i. Two back-to-back 6 months terms is OK, but cannot include option to renew in either
b. Unless provision for renewing included
c. Will not be excluded if T already in occupation for 12months or more when lease comes to be granted
3. Contracted-out tenancies
a. Must be for fixed term
b. s.38(4) – allows parties to agree for security of tenure NOT TO APPLY to any given tenancy
i. not applicable to periodic tenancy
c. For leases granted prior to 1 June 2004, court approval needed
d. For leases granted after 1 June 2004, notice procedure applies: - LTA 1954 s.38(4) and the transitional provisions
found in s.29(3) Regulatory Reform (Business Tenancies) (England and Wales) Order 2003
i. Complete either before lease granted or before T becomes contractually bound to take lease
ii. LL must give T notice in prescribed form which warns that they are agreeing to lease without security of
tenure and advising to obtain professional advice
iii. T makes declaration that has received notice
1. If T given notice by LL less than 14 days before grant of ease/contractually bound then must make
statutory declaration before independent solicitor
iv. Reference to service of notice and Ts declaration must be contained/endorsed on doc creating the lease

i.e. if head-lease were granted pre 1st

June 2004 and the sub lease was granted
after 1st June 2004 then follow the
procedure for post- 1st June 2004
Business tenancy can only be terminated in one of following ways:
1. By service of LLs notice under s.25
2. By service of a tenant’s request for a new tenancy under s.26
3. Forfeiture
4. Surrender
5. In case of periodic tenancy, by LL giving notice to quit
6. In case of fixed-term lease, by T serving 3 months written notice on LL under s.27 (cannot expire before contractual expiry date)
7. In case of fixed term lease, by T not being in occupation for business purposes at end of lease
a. No notice or warning need be given – Esselte AB v Pearl Assurance plc
NB – can still be forfeited for breach of covenant in usual way

The Section 26 request

• Not available to:
o periodic tenancies
o fixed terms of one year or less
• Must state:
o Proposed terms of new tenancy
o Date on which to begin
 Must not be less than 6 months before nor more than 12 months after service and cannot be before contractual
termination date (though can be later than that date)
o If LL wishes to oppose, must serve counter notice on within 2 months of service of Ts s.26 request
 Must also state s.30 grounds of opposition
• If LL does this, T must ensure he applies for new lease or will lose rights under act
o Must apply before commencement date of new tenancy specified in s.26 request
 LL could pre-empt by applying for order to terminate lease on grounds stated in counter notice
o If LL doesn’t wish to oppose, need not serve counter notice
 T should still apply to court for new tenancy before expiry of s.26 notice, lest he lose his rights under the act

Who should the sub-T serve notice on? - the competent landlord
• Lease granted out of freehold
o Competent LL = Freeholder
• Sub-lease to T2
o Ts lease does not have security of tenure i.e. LTA 1954 doesn’t apply
 If T1 lease has more than 14 months left to run
• Competent LL = T1
 If T1 lease has less than 14 months left to run
• Competent LL = Freeholder

o Ts lease does have security of tenure

 If no measures taken to end Ts lease
• Competent LL = T1
 If measures (s.25 or s.26) taken to end Ts lease, Ts lease will end within 14 months
• Competent LL = Freeholder

Either s.25 and s.26 notice must have

been actually served
The Section 25 notice
The prescribed form
• Not less than 6 and no more than 12 months prior to date of termination specified in it
• Date for termination cannot be before contractual termination date
• Must state whether LL will oppose application by T to court for new tenancy and on what statutory grounds he will rely
o Grounds set out in s.30
• Often LL is willing to grant new lease and is merely terminating so as to grant a new one on different terms i.e. higher rent
i.e. the date of termination of the
The application to the court
• T must apply to court for new tenancy before expiry of s.25 notice, lest he losetenancy
his rightslisted
under on
the the
act notice
• Time limit can be extended by agreement between parties
• Application usually made to CC
• Where LL opposes new tenancy, proceedings rarely reach court hearing and outside agreement arrived at
• If LL opposes, Ts only chance of new lease is to apply to court within time period under s.25; OR
• LL can pre-empt this by applying for order to terminate lease on grounds stated in s.25

LL’s grounds for opposition under Section 30 – must oppose before date of termination
1. Discretionary grounds – LL must show T ought not to be granted new tenancy in view of facts giving rise to grounds:
a. Ground A – Tenant’s failure to repair
i. Must be serious and T must not have repaired before the court order was made
b. Ground B – persistent delay in paying rent
c. Ground C – Substantial breaches of other obligations
d. Ground E – sub-letting of part where higher rent can be obtained by renting the whole
i. ***Compensation may be paid if used***

2. Mandatory grounds
a. Ground D – alternative accommodation
i. Must be suitable to Ts needs and on reasonable terms

b. Ground F – LL intends to demolish or reconstruct and could not reasonably do so without obtaining possession
i. LL must show that on termination of tenancy:
1. Fixed and settled intention to carry out relevant work (on date of court hearing)
2. Intends to demolish/reconstruct premises (or substantial part) or to carry out substantial works on the
holding or a part of it
3. Cannot reasonably carry out work without obtaining possession
a. T could prevent LL proving this by agreeing terms on which LL could have access
4. ***Compensation may be paid if used***
c. Ground G – LLs intention to occupy the holding for his own business or residence
i. Won’t be able to rely on if re-letting premises
ii. Cannot rely on if his interest was purchased/created within 5 years before the ending of the current tenancy
1. ***Compensation may be paid if used***

Compensation for failure to obtain new lease

1. Where LL’s s.25 notice/counter-notice to a s.26 request specifies only one or more of grounds E, F and G; OR
2. Where LL has specified one or more of grounds E, F or G along with other grounds, and the court refuses to grant a new tenancy
solely on one or more of grounds E, F or G i.e. the no-fault grounds

• Equivalent to rateable value of the holding; UNLESS
• T and predecessors have been in occupation for at least 14 years, when it will be twice rateable value

Contracting out
• Any agreement restricting/excluding payment of compensation void if T or predecessors in same business have been in
occupation for 5 years or more
• THEREFORE – contracting out possible where T in occupation for less than 5 years

Interim rent
• Where T applied for new tenancy, current will not end on expiry of s.25 or s.26
o Will continue until 3 months after conclusion of proceedings
 LL or T can apply for interim rent to apply pending outcome of proceedings
• Normally rent payable under new lease; UNLESS
Interim rent set at market o LL opposing grant of new tenancy; OR
rent for a yearly tenancy of o Terms of new lease substantially different; OR
premises ‘having regard’ to o Rental values have changed significantly in period before grant of new lease
the rent under the old lease –
normally results in lower rent
being assessed which is why
LLs have penultimate day
rent reviews
Purchase price

• Most common
• Buyer must ensure financial arrangements are in place before entering into a commitment to acquire target

• Buyer issues shares in itself in exchange for the shares of the target
• Shares will need to be readily marketable (private company shares unlikely then)
• Buyer may prefer this to limit its borrowing requirements
• Seller may prefer this so as to roll over the capital gains on sale until disposal of new shares
• Should state how the shares rank and what rights are attached i.e. dividends
• Buyer may also include clause restricting how many of the new shares the seller can dispose of in any given time period after
• Where seller wants cash but buyer wants to issue shares, use ‘vendor placing
o Buyer arranges for shares to be sold on immediately following completion to institutional investors
o Buyer undertakes that the sale will yield a specified sum

Loan notes
• Buyer pays at intervals
• Clause allowing seller to demand some or all of price stated after specified period e.g. 12 months
When is the purchase price paid?
Completion accounts
• 1 amount paid on completion, another amount (paid or refunded) following completion accounts
• Common for agreed price to be adjusted after completion of accounts following completion
• Initial valuation may have been against most recent accounts but buyer may want this confirmed
• Agreement may provide for maximum amount of consideration to be paid on completion subject to a repayment if necessary after
completion of accounts following completion

• Typical clause:
o Completion accounts to be drawn up within specified period after completion e.g. 1 month (seller’s accountant usually
o Buyer (or seller if buyer’s accountant prepared accounts) have right to dispute account within specified period
o In absence of agreement, matter to be referred to independent firm of accountants

Earn outs
• Portion of price left unpaid at completion
• Balance is determined by reference to performance of target company for specified period after completion e.g. 3 accounting
• Appropriate where sellers continue to manage the company after completion
• Clause should provide for:
o Who will prepare accounts
o What basis they will be calculated e.g. net profit, earnings etc
o Mechanism for resolving disputes i.e. refer to independent accountants
• May agree that deferred consideration to be in form of shares
• Buyer may also retain right to deduct any warranty claim that may arise from the deferred consideration

• Pros
o Buyer
• Maintains decent cash flow since doesn’t need to pay all in one go
• Avoids buyer paying over the odds
• Acts as motivating factor for selling managers following sale since they will receive more for the balance if the
company performs well
• Provides more accurate valuation
• Previous years’ accounts may have been made at time of abnormal success
• Spread the risk of potential loss in profits
o Seller
• Allows to maintain continual involvement in the development of the business
• May be able to get more money if beats targets set
• Advantage of buyer’s experience/synergies may improve profitability

• Cons
o Sellers who continue to manage and buyers may pull in different directions following completion
• Sellers will want to ensure high profit margin
• Buyer will want to ensure decisions made which guarantee long term profitability for the target, at expense of
short term profits

• May get around this by setting objectives for the earn out period and obligations/restrictions i.e. buyer not to sell
whole or part of business nor to permit any non-arms length trading between target and buyer

Instalments as means of financing the acquisition

• Seller may agree to instalments (plus interest on the outstanding amount)
• Will usually demand some form of security i.e. 3rd party guarantor
• If a charge is taken over the assets of the target then this will constitute financial assistance
o Only allowed for Ltd companies and only where special procedures are followed

Division between sellers

How much of price to be paid to each will be stated in schedule
• May be simultaneous with exchange of acquisition agreement
• May be conditional and therefore within specified time of fulfilment (or waiver) of condition
• Agreement will specify:
o What docs each party must deliver to the other
o Steps which each party must take on completion
o Agreed forms of minutes of board and general meetings (annex to agreement)

Restrictive covenants
• Share acquisition agreement will often restrict sellers from:
o competing with target company
o soliciting customers, suppliers and employees
o using or disclosing confidential information

How is the seller taxed when consideration is deferred

Where value of consideration deferred is ascertainable
• even if some part is deferred, CGT payable on total consideration by reference to date of sale – s.48 TCGA 1992
o adjustment will be made if seller doesn’t eventually receive full amount of deferred consideration
• Any payment made from seller to buyer following completion in respect of warranties or indemnities will reduce proceeds of sale
and therefore, the gain for CGT purposes

Payment by instalments
• Where over period of 18months or more
• Tax may be paid by instalments at option of taxpayer
• Must agree instalment schedule with HMRC

Where amount of deferred consideration is unascertainable

• Earn out agreements
o (A) Taxed at completion on: Marren (Inspector of Taxes) v Ingles
 Consideration actually received
 Estimated value of earn-out (right to receive future consideration = ‘chose in action’) as estimated by the
o (B) Taxed when actually receive earn-out on:
 Actual amount of earn-out LESS value of HMRC initial estimate

NB – Flat rate CGT of 18% now.

NB2 – No taper reliefs etc

Deferred consideration satisfied in shares

• Seller can treat the shares as a security for capital tax purposes and roll over the gain until disposing of the shares
Completion accounts

• Completion accounts intended to lead to a price adjustment
o Audited accounts will be out of date
o Management accounts are less reliable
• Allows transaction to proceed where uncertainty as to price/warranties given
o Buyer can retain some of the consideration for security; OR
o Seller can hold all consideration then make refund
• Types of price variation:
o Net asset mechanism – price increased or decreased on completion depending on whether net assets on completion are
higher or lower than pre-determined target
o Cash free, debt free, normal to actual working capital mechanism -
• Types of completion account:
o Full profit and loss account and balance sheet
o Balance sheet
o Net assets statement
o Valuation of a specific asset or assets, such as cash or working capital

Locked box mechanisms (share transactions, not good for asset transactions)
• Fixed price determined in advance with reference to accounts up to an agreed date
• Advantage for seller as, because there are no completion accounts, it has certainty of proceeds
• Possible disadvantage for buyer as no opportunity to vary
o Must be familiar and satisfied with the agreed accounts
o Usually clause requiring agreed account to be prepared with ‘reasonable care’ and using figures extracted from last
audited accounts

• Often an interest mechanism applied to price from date of agreed accounts to completion
o Alternative is to use ‘daily earnings amount’ reflecting earnings of target for same period

• Buyer will also require protection from ‘leakage’ being accrued by seller in form of:
o Dividends
o Other distributions or returns of capital not being on arm’s length in ordinary course of business
o Fees/expenses in connection with transaction and other costs inappropriately put through target
o Payments made/assets transferred to/liabilities assumed, indemnified or incurred for benefit of any target shareholders or
connected persons, other than agreed as ‘permitted leakage’
• Seller will provide undertaking that any leakage other than permitted leakage be repaid to buyer on £for£ basis

• All restructuring must be completed prior to date of agreed accounts

How the completion accounts are to be prepared and what the SPA should define/provide for
What general regulatory framework will be used
• SPA should define hierarchy of accounting policies to be adopted
• SPA should set out precedence of policies:

1. Specific policies agreed by parties in SPA

2. Policies adopted by target company/business in last audited accounts
3. Generally Accepted Accounting Principles, UK GAAP (as defined in SPA) or International Financial Reporting Standards
a. Rare that UK GAAP used exclusively
b. Must define whether UK GAAP is intended to mean IFRS as applicable in the UK

• Any ambiguity in policies should be clarified in the SPA

• Basic point is that SPA should be clear, unambiguous and consistent about what policies are to be used

What specific accounting policies are to be adopted, including definitions etc:

NB – the overriding regulatory
Cash and debt definitions framework (to some extent) and the
• Use balances taken from target accounting records, not bank statements specific policies are all negotiable –
o Avoids omitting items ‘lost in transit’ there is no standard as to what should
be used
• Use clear and unambiguous definitions of each in the SPA
o What should and should not be included as cash and debt in completion accounts

Stock and WIP

• How are both to be defined
• What value can be attributed to each
• What will be obsolete (and thus not applicable) stock

Fixed asset valuation

• Define how assets to be valued (historic cost, valuation or economic value in use?)
• Buyer will want a clause preventing any upward variation of agreed price
• Seller will want clause preventing impairment provisions being booked against fixed assets which would lead to
reduction in price under a net asset mechanism

• Value of bad and doubtful debt needs to be ascertained
• Define when a debt will become bad

Other difficulties
• How long should be allowed from completion to prepare the completion accounts?
• Usually include clause defining ‘hindsight period’ (point up to which preparer of accounts delivers first draft of
accounts to reviewer
Reducing the scope for dispute
• Usually valued at ‘lower of cost and net realisable value’
o What proportion of production overheads should be included in cost?

o Must expand definition to include how each element is to be calculated

 cost
 Net realisable value of stock
 Slow moving stock (how defined and its value which will be %age of normal stock)

• Define from when and for how long a period the fixed asset will be depreciated
• Avoid the phrase “over the expected useful life”

• How to define/account for bad debt:
o 25% deduction of specific debt where over 3 months old
o 50% deduction where over 6 months old
o 100% where debtor in receivership or where account is in hands of solicitors

Gap between exchange and completion

• Where not simultaneous, include restrictive covenants preventing seller from improving position of company prior to completion
accounts i.e. manipulating levels of stock
Who prepares completion accounts? – negotiable (dependent upon bargaining power usually)
• Either buyer or seller (with input from respective accountants)
• Reviewed by other party
• In practice in share sale, normally buyer will prepare
o Thought that preparer of first draft normally has advantage
• Control
• Power to scrutinise
• Their take on the value of the company/assets

• SPA should include clause agreeing time for preparation of completion accounts and subsequent review(X business days)
o Date when preparer will deliver first draft
• Possible sanctions if either party fails to meet deadlines for preparing/reviewing
o Use an escrow account
 Both parties contribute to the account and funds will only be released on successful completion of certain thing
i.e. preparation and delivery/review
o Apply reasonable rate of interest from completion date to any purchase price adjustments

Agreement of the completion accounts

• Common for agreement to be between buyer and seller (and their respective accounts) without need for external auditing or the
• Should be effective sanction for failing to agree within specified period

Rejection of statement
• If reviewer doesn’t agree, SPA should allow for reasonable period for discussion
• If no agreement in this period, dispute resolution mechanism should be triggered

• SPA should provide for each party to allow the other access to relevant books, records and information
• May also include right for non-preparing party to monitor the preparation process closely
o Stock take monitoring, for example
• SPA should provide for them to be referred to:
o Independent accountant(s) to be agreed by parties; OR
o If cannot agree within specified time, accountant to be nominated by president of the ICA

• Other issues:
o Assistance – contractual obligation on both parties to give access/assistance to the nominated accountant

o Submissions to independent accountant – whether they should be allowed, whether the accountant would need to invite
such submissions

o Timing – specify time frame for independent accountant to complete within

o Expert not arbitrator – state that accountant is “acting as expert not arbitrator” and that decision will be final and
binding. Enables parties to avoid Arbitration Acts and to prevent any right of appeal

o Cost – specify how costs to be split, or allow for accountant to determine balance of costs
 Sometimes will stipulate that party referring dispute to accountant should bear cost, unless accountant finds in
their favour and the adjustment is greater than a specified amount i.e. 10%

o Any certificate or determination – given by accountant must be certain (Shorrock Ltd v Meggitt plc)

Adjustment to the purchase price

• Issues to consider:
o Adjustment of purchase price
 £for£ basis except where adjustment linked to profit
 Cash
o Double recovery
 If net assets are lower than anticipated, buyer may wish to bring action for breach of warranty whilst also
paying lower price
 Should include clause to prevent such ‘double recovery’
o Set-off
 Buyer will wish to include a right to offset any outstanding warranty payments due from seller against the
additional price that buyer is required to pay
 Seller will resist this as burden will be on them to prove additional payment due from buyer is unreasonably

o Payment into joint account

 Escrow account
 Buyer pays in anticipated extra amount to be released upon completion of accounts and determination of what is
to be paid
 May need to split the amount between parties, pay all to one or the other
 SPA should be drafted to set out clearly how funds and accrued interests should be split
 Provide for any dispute

o Interest payments
 If escrow account not used
 Seller may require buyer to make notional interest on any additional consideration from date of completion to
date of payment
 Buyer may require similar from seller if refund of some consideration is required

o Guarantees
 If a large extra consideration is anticipated
Tax considerations
Shares, land and buildings
Stamp duty
• Shares – 0.5% to nearest £5
• Interest payable on unpaid duty after 30 days from execution of documents

Stamp Duty Reserve Tax

• Also 0.5% on consideration for shares
• Generally won’t apply where stock transfer forms properly executed, stamped and the duty paid

• Payable automatically 30 days after completion
• <£125,000 (<£150,000 for commercial property) – No Tax Payable
• >£125,000 <£250,000 – 1% of purchase price
• >£250,000 <£500,000 – 3% of purchase price
• >£500,000 – 4% of purchase price

Tax on chargeable gains

• Seller may need to make quarterly payments before final consideration is definitively determined
• Will have to pay on basis that maximum amount of consideration is to be paid

Summary – Should you use completion accounts

1. Appropriate for valuation purposes
a. can be adapted for specific aims of the buyer/seller
2. Up to date information
a. rather than relying on older audited accounts
3. Time saving
a. By deferring detailed valuation until after completion, negotiation period can be reduced
b. So long as basis and scope of completion accounts can be agreed during negotiation

1. Potential for dispute
a. Over scope and basis of completion account preparation
b. Less likely to compromise as they would have done in pre-contract negotiations since less incentive for them to do so
2. Delay in ascertaining price
a. Depending on complexity of completion account preparation, could be long delay in determining price and negotiating
what the accounts will cover
3. Difficult to isolate specific elements
a. What is and is not to be included in the accounts may be difficult to define
b. Seller may wish to include unanticipated benefits to buyer whilst buyer will not
4. Cost
a. Of preparing the accounts in the first place
b. If independent firm of accountants has to be used because if disagreement, costs will rise


General points
• Buyer drafts SPA so all warranties/representations/indemnities heavily in their favour
• SPA will be heavily negotiated so no right or wrong answer
• Bargaining power of parties will play large role in determining the content
Warranties (contractual)

What are they?

• Initially drafted by buyer
• Undertaking by seller that particular state of affairs exists at date of exchange and/or completion
o If exchange and completion not simultaneous then seller will need to make them at exchange and again at
• No seller will give them unless they are allowed to disclose against them i.e. tied in with DD process
• Used to elicit information about business from seller
o Prompts the seller to disclose information
• Provides means of redress for buyer if acquisition turns out to be other than what they bargained for

What remedies are there for a breach of warranty?

• Contractual remedy
• Damages; AND/OR
• Repudiation where the warranty goes to the heart of the contract and is therefore a condition as a result
What damages are recoverable?
• Aims to put buyer in position would have been had contract not been breached i.e. diminuation in value of shares
• Hadley v Baxendale – not too remote and either:
o Flows naturally from breach; OR
o Fairly and reasonably in contemplation of parties at time entered into contract as the probably result of the breach

How are these principles applied to breach of warranty on a share acquisition?

• Difference in value of shares with Vs without the breach
• Will depend on how shares are valued:
o Earnings basis i.e. apply multiplier to warranted level of profit and actual level of profit and calculate difference
o If breach results in assets being less; this has no direct effect on shares so application difficult (see remedy in next

Can parties interfere?

• Yes
• Can specify how any possible loss will be quantified i.e. specific multiplier to apply to shortfall
• Can include clause obliging seller to pay for any deficiency in assets or any other undisclosed liability arising from breach of
warranty (covers problem re: asset/share issue, above)

• Free to agree any amount payable for damage so long as genuine pre-estimate of loss that would be suffered (‘liquidated
damages’) and not a punitive amount designed to threaten (‘penalty’)
Representations (tortious)

What are they?

• Initially drafted by buyer
• Statement made inducing a party to enter into the contract
• Warranty can also be a representation depending on the wording of the SPA
What remedies are there for a breach of representation?
• Tortious remedy
• Damages; AND/OR
o How are they calculated?
 aim to place in position as if contract had been performed – Attorney General v Blake
 Hadley v Baxendale principles
• Causal link (common sense test)
• Not too remote; AND EITHER
o Flows naturally from breach; OR
o Fairly and reasonably in contemplation of parties at time entered into contract as the probably
result of the breach
 Koufos v C Czarnikow Ltd and Victoria Laundry (Windsor) Ltd v newman
Industries Ltd
 Innocent misrepresentation
• Damages generally not recoverable unless the representation is, or becomes, a contractual term
o Court has discretion to award damages in lieu of rescission for innocent – s.2(2) Misrep
Act 1967
o Cannot award damages in lieu of rescission if rescission no longer available because of
one of the bars to rescission – Government of Zanzibar v british Aerospace (Lancaster
House) Ltd
 Negligent
• Maker unable to show that had reasonable grounds for believing, nor did believe, that statement
was true
• Court must award damages – s.2(1) Misrep Act 1967
 Fraudulent
• Damages always recoverable for fraudulent misrepresentation
• Maker had no genuine belief in truth of statement
• Tort of deceit
• Damages aim to restore parties to pre contract position
o Difficult to prove and a bit pointless as damages assessed on same basis as for negligent

• Rescission
o Often not possible on a share sale
What buyer and seller will want, generally
1. Buyer will want all warranties to also be representations because this gives the widest protection (tort and contract)
2. Seller will only want the warranties to be included as part of the SPA (entire agreement clause)

Examples of how damages would be calculated:

X buys Y for £5m and Y is in fact worth £5m but a breach of warranty results in a £500,000 reduction in value
No difference
1. Contract Claim:
a. Market Value where no breach of warranty = £5m
b. Market Value as it actually is with the breach = £4.5m
c. Buyer receives £500,000 damages

2. Tort Claim:
a. Price Paid = £5m
b. Market Value as it actually is with the breach = £4.5m
c. Buyer receives £500,000 damages

X buys Y for £4m and Y is in fact worth £5m but a breach of warranty results in £500,000 reduction in value
Contract (warranty) claim more favourable
1. Contract Claim:
a. Market value where no breach of warranty = £5m
b. Market value as it actually is with the breach = £4.5m
c. Buyer receives £500,000 damages

2. Tort Claim:
a. Price paid = £4m
b. Market Value as it actually is with breach = £4.5m
c. Buyer receives nothing as has suffered no loss

X buys Y for £6m and Y is in fact worth £5m but a breach of warranty results in £500,000 reduction in value
Tort (warranties as representations) claim is more favourable
1. Contract Claim:
a. Market value where no breach of warranty = £5m
b. Market value as it actually is with breach = £4.5m
c. Buyer receives £500,000 damages

2. Tort Claim:
a. Price Paid = £6m
b. Market Value as it actually is with breach = £4.5m
c. Buyer receives £1.5m


What are indemnities?

• Initially drafted by buyer
• Promise by seller to reimburse buyer if designated type of liability arises in future
• Buyer will want indemnities for everything
• Seller will only want to give them for some

Who gives the warranties and indemnities?

Joint and several liability
• All sellers are liable
• Buyer will demand this where more than one warrantor
o S.1 Civil Liability (Contribution) Act 1978 allows individual warrantor to claim contribution from other
warrantors where sued individually
 Warrantors should agree how liability to be split using a ‘deed of contribution’

Who may be unwilling to give warranties?

• Minority shareholders
o Buyer will not normally require they make warranties
• Shares held in trust
o Trustees normally required to give warranty up to net value (after tax) of capital of the trust and to require any
beneficiaries to which property distributed to give similar warranty

Assignment of warranties/indemnities
• May be necessary where buyer wishes to sell business soon after acquiring
• Possible only with express provision
o Contracts (Rights of Third Parties) Act 1999 also allows benefits of warranties/indemnities to be assigned and to
confer power to enforce on third parties
• Seller likely to oppose provision on grounds that buyer could potentially assign to anyone
o Will be negotiated – maybe right to assign conditional on initial seller’s approval

Buyer’s security for breach of warranty

• What is seller cannot pay up when indemnity is required?

• If seller part of a group, security may come from parent/holding company
• If seller individual, buyer may demand charge over assets

Retentions from the purchase price

• Buyer to retain specified amount of price for specified period after completion to cover any possible claims
• Provision in following terms:
o Payment of retained money into joint accounts of seller’s and buyer’s solicitors; AND
o Retention to be remitted to the seller on a certain date after completion (e.g. 12 months) unless the buyer makes a
claim under the warranties and indemnities before that date; AND
o Where buyer does make such a claim – balance to be paid to seller on specified date
o Buyer to be paid amount of any claim within short period (e.g. 14 days) and balance remitted to seller
o Payment of interest to parties in same proportions as they receive retention/remittance
o Buyer to pursue any claims against seller promptly and diligently

• Retention will not affect capital tax position

o Will only be affected to extent that money used to make warranty/indemnity payments
How may the SELLER limit its liability under warranties and indemnities?

Negotiation on wording in the SPA

• Deletion of certain warranties and indemnities after first draft
• Negotiating changes to wording e.g. reasonable rather than best
o Reasonable
o Materiality
o Change so not on indemnity basis and just on contractual basis i.e. exclude representations as warranties and pre-
contractual statements
o Limit to seller’s knowledge
• Standard limitation clauses
o Creation/transfer of securities/interest in securities/business sale agreements not governed by UCTA 1977 – Sch 1
Para 1(e) UCTA 1977
o Reasonableness test only applies where dealing on party’s written standard terms of business or where a party is
dealing as a consumer – s.3 UCTA 1977
• Alter definitions
o E.g. if one warrantor is deemed to be accepting too much liability for the amount of input they have (may not be a
director, for example) then alter definition of ‘warrantors’ to exclude them so they will not be severally liable for
breaches of warranty
• Buyer’s knowledge to be taken into account? (SEE DISCLOSURE IN NEXT SECTION)
o Eurocopy/Infiniteland

General Limitations

Limits on the amount of claims

• Entire agreement clause
o That SPA constitutes the whole agreement and that buyer cannot rely on any other representations etc that have been
• Maximum limits
o Usually purchase price paid by the buyer
o Sometimes buyer will lose more but seller unlikely to agree to limit higher than what it received
• Buyer may be expected to inject money into business after purchase to discharge liabilities – if this is
the case these injections should be treated as part of the overall consideration

• Minimum limits
o Usually about 1% of the consideration
 May also wish to insist on a de minimis threshold for each individual claim e.g. £5,000
• Further limit that will not respond to any claims until aggregate value of all claims exceeding £5000
totals £20,000
o Buyer should insist that once threshold is breached it is allowed to recover the full amount and not just the amount
exceeding the threshold

• Time limits
o Normal contract – 6 years from date of contract
o Deed – 12 years from contract (or 12 years from tax matter covered where separate deed of tax indemnity)

o Normal for seller to agree to shorter period of potential liability for tax matters e.g. 7 years
 HMRC’s time limit for them to make a claim against a company is 6 years
o Even shorter for non-tax matters and often linked to target company’s audit
 Usually allows for 2 full audits to be carried out before potential liability expires
o Sometimes clause allowing buyer to bring claims outside this period where is provides sufficient detail to the seller
 Should still insist on a long stop for this to avoid liability continuing indefinitely

• Insurance cover
o Seller will insist that claims cannot extend to something covered by insurance
 Arguments over what can reasonably be expected to be covered by insurance

• Recovery from third parties

o Company should attempt recovery from 3rd parties first, where possible
o Buyer may have to agree to deduct anything received from third parties in relation to a claim when claiming further from
the seller in relation to same issue i.e. no double recovery

• Assets under/overstated in the accounts

o Allow for set-off i.e. deduct value of understatement from overstatement`
o Buyer should be wary, especially if valuation if target was not based on assets

• Conduct of claims
o Where third party takes action because of a breach of warranty made by seller – who should handle case?
o Seller will say they should since buyer may handle less vigorously and thus seller will be forced to pay out
o Buyer will say that if seller loses then damage to reputation of the target and thus, the buyer’s acquisition, will be harmed

o Whoever is agreed to have control, the other will be allowed to have some influence e.g. require consent to settle out of

Nature and purpose of the disclosure letter
• Helps seller avoid breach of warranties in relation to matters disclosed
• Buyer will take a view of the seriousness and impact on acquisition of any disclosures made
o May prompt withdrawal from acquisition/re-negotiation of price/indemnity

Full disclosure
• Acquisition agreement will provide that warranties are given subject to matters disclosed in the disclosure letter
• Seller will want to make all disclosures as specific as possible as buyer must be given specific notice of all disclosures for them to
be valid – Levison v Farin
• Buyer will usually insist copies of docs relating to all matters disclosed be attached to the disclosure letter so they may be
o Buyer will also insist on disclosure being limited to matters in the letter and bundle
• Clause stating that warranties are only qualified by matters contained in the letter and not by the buyer’s own knowledge
o Dodgy ground – buyer may not be able to rely on this but not certain – Eurocopy plc v Teesdale
o Where general disclosure (rather than specific) is used, buyer’s own knowledge will be relevant –
Infiniteland Ltd v Artisan Contracting Ltd

Overlap between warranties

• Disclosure letter normally provides that each disclosure is deemed to be in respect of all warranties and not merely the warranty
referred to in it

Deemed disclosures
• Letter will refer to these, publicly available pieces of information, that buyer expected to find itself:
 Information on target’s file at Companies Registry
 Matters apparent from deeds of properties owned that would be available on conducting relevant searches at land
Registry and Land Charges Department
 Maters that would be apparent on inspection of the property
• Buyer should only accept where full survey has been commissioned
 Matters within the public domain
• Buyer should seek to restrict this to those matters in public domain it could reasonably be expected to be aware
 Matters disclosed or referred to in audited accounts (e.g. for last 3 years)
 Matters included or referred to in the accountants’ report prepared on behalf of the buyer
• Negotiation over this because often purpose of report varies so buyer may not wish to have to rely on it

Insuring against liability

• Sellers and/or buyers sometimes get warranty/indemnity insurance
• Costly – 1-5% fee of limit of liability
• Takes time – insurers often want to look through all acquisition docs
• Agreement should include a clause obliging buyer to claim from insurer before commencing action against seller


1. Is there a breach of warranty?

a. Was it a material breach?
b. Has material been defined?

Check the SPA as to what constitutes a breach (or state that you would need to check it)

2. Has there been a loss?

a. If this specific claim was not provided for in completion accounts or anything then there is likely to have been, or to
be, a loss to the buyer

3. Was disclosure given?

a. Correct standard – “full and fair” under Levison v Farin

4. Buyer’s knowledge
a. Effect will depend on court:
i. What do terms say
1. Is it a Eurocopy (buyer friendly) or Infiniteland (seller friendly) exclusion clause as to buyer’s
a. See disclosure section – next section
1. For the buyer to elicit information
2. For the seller to qualify warranties and prevent the likelihood of claims being made by the buyer

Buyer will take view of the disclosures given in terms of seriousness and impact and this may trigger:
• Withdrawal from acquisition
• Re-negotiation of price
• Indemnities
• Seller wants to make as many disclosures as possible to limit possibility of any claims against it
1. will want to give general disclosure (to cover mattes it isn’t expressly aware of)
2. will want to give specific disclosures of breaches it is aware of
• Buyer wants to be able to make as many warranty claims as possible
1. wants disclosures to be as specific as possible
2. will want to avoid general disclosures as these will limit its ability to bring claims
Standards of Disclosure
High Standard/Buyer Friendly (Levison and others v Farin and others style)
Save as disclosed in the disclosure letter with enough detail to identify the nature, extent and scope of any losses/continuing losses

1. Save is disclosed in disclosure letter – limits what can be taken account of i.e. if not in the letter then buyer can make a claim
2. With enough detail to identify the nature, extent and scope… - any disclosure in the letter must be specific enough to allow the
buyer to have made conclusions from it as to current and future potential losses etc

Low Standard/Seller Friendly

Save as disclosed

1. Save as disclosed – allows seller to rely on all info passed to buyer including the disclosure letter, discussions, bundles of

The sellers jointly and severally warrant to the buyer that the contents of the Disclosure letter, and all accompanying documents, are
true and accurate in all material respects and fairly disclose every matter to which they relate
Buyer’s Knowledge
Buyer friendly (Eurocopy plc v Teesdale and others style)
Save as disclosed in the disclosure letter, there are no other facts or matters which will prejudice any claim made by the buyer in
respect of the warranties

1. The knowledge of the buyer will not be taken into account in limiting when they can claim i.e. even if they have actual,
constructive or imputed knowledge of a breach of a warranty, they can enter into the agreement and still make a claim against the
2. the disclosure is limited to that given in the disclosure letter

Seller Friendly (Infiniteland Ltd and another v Artisan Contracting Ltd and another style)
Save as disclosed and subject to the actual, constructive and imputed knowledge of the buyer, howsoever obtained (save where
obtained fraudulently) there are no other facts or matters which will prejudice any claim made by the buyer in respect of the warranties

1. The actual, constructive and imputed knowledge of the buyer will be taken into account when assessing whether it can make a
claim for breach of a warranty i.e. if, regardless of disclosure that is given, the buyer knows of a breach of warranty either on its
own (actual), through an agent (imputed) or it ought to have known (constructive) then this will prevent it bringing a claim
2. Disclosure is not limited to the letter and can take account of bundles, discussions etc etc

The rights of the buyer in respect of the warranties shall not be prejudiced by investigation of the company, save to the extent that
such investigation gives the buyer actual knowledge of the relevant facts or circumstances.

Ways to negotiate and alter disclosures to help the buyer

1. Limit the type of info to which disclosure is deemed to be given e.g. excluding accounts information
2. Limit how far back in time disclosure is deemed to have been given to e.g. past year/last audited accounts…
3. Exclude accounts information to be deemed to be disclosed
4. Agree exactly what types of searches will deemed to have been carried out i.e. re: property and at Companies House
5. Delete phrases such as:
a. “that the prudent buyer would carry out” – very vague
b. “in the public domain” – too wide, difficult to keep track of, very onerous
6. Limit the scope of any searches to 1 or 2 days prior to completion
a. Ask for specific warranty that nothing will have changed after this date
b. Ask for specific disclosure of anything that may (have) happen(ed)
7. Limit balance sheet info to that specifically provided for and not just ‘referred to’or ‘noted’
8. Ask for warranty that accounts are true and accurate
9. Alter words/definitions – what is a similar business etc?
Summary points
1. Warranties themselves are subject to disclosures
2. Warranties are not subject to buyer’s knowledge
3. Buyer’s knowledge may be a factor which limits their ability to claim (saving provision)
4. Look at the construction of the SPA to determine what can be taken into account and what the standard of disclosure was
a. Both parties negotiated and entered into the agreement so should have set their own standards
5. You cannot accept a disclosure against a warranty that you also offer an indemnity against (in an attempt to avoid paying the
a. May disclose against certain breaches and offer indemnity against anything you don’t know about
6. There will usually be a ‘sweeper’ disclosure which deems all disclosures to be made against all warranties in case the seller
forgets to make a specific disclosure

How warranties and disclosures are assessed

1. Look at the list of information to be disclosed
a. there will usually be a ‘sweeper’ disclosure which deems all disclosures to be made against all warranties in case the
seller forgets to make a specific disclosure
2. Match it up against the warranties that relate to it (may be more than one)
a. Disclosure: Supplier contract that would terminate on change of control
b. Relevant Warranty: That not suppliers will cease to trade with company as result of change of control
3. Construct the disclosure letter stating that “information X is deemed to be disclosed against warranties 1.2, 6.4(a)” etc
How to approach an exam question
1. Is there a breach of a warranty?
a. Check the operative clause
b. Check what warranty the Seller made in relation to the operative clause
c. Have the facts meant that the Seller has gone against its warranty?
2. Did the Seller disclose the breach/problem?
a. Check if adequate disclosure has been given
i. What was the standard (general or specific)
3. Did the Buyer know about the problem?
a. What sort of knowledge does the Buyer have (actual, imputed or constructive?)
b. Does the operative clause provide for any knowledge to be taken into account when assessing the Buyer’s ability to bring
a claim?
4. Has the Seller limited their liability for any claims?
a. Check the Schedule of Limitations
Share Sale
• Ownership of Business doesn’t change
• Ownership of Company changes


Buyer Shareholders



Business/Asset Sale Business

• Ownership of Business
• Ownership of Company
doesn’t change

Buyer Company


• Target may not have own legal identity so will need to decide between parties which assets constitute the business
• Intangibles are sometimes more difficult to identify e.g. contracts, debtors and creditors
How to transfer
1. Novation (rarely used)
a. negotiate with the 3rd party to release the seller from their obligations under the contract and for buyer to assume burden
and benefit

2. Assignment (commonly used)

a. Will only transfer benefit and not the burden
i. Seller will want an undertaking from the buyer that the buyer will perform the obligations under the contract
and an indemnity for if it doesn’t
b. 2 possible types:
i. Legal:
1. Less common as requires:
a. Agreement to be in writing; AND
b. notice to be given and consent received from 3rd party under s.136 LPA 1925
2. Allows buyer to sue 3rd party directly if necessary
ii. Equitable:
1. More common except for key contracts
2. Buyer would have to request seller sue 3rd party if necessary
The Main issues
1. Burden is left outstanding on an assignment so seller will want the undertaking and indemnity identified above
2. if assignment/novation doesn’t come through in time then the buyer or seller must agree to act as agent/sub-contractor for the
other party and back this up with an indemnity
3. What if consents to assign etc are delayed?
a. Routine Contracts
i. Parties will normally not worry about getting express consent to assign prior to completion
ii. Include clause stating that both parties will use best endeavours to obtain consents
iii. Buyer will undertake to perform contracts on behalf of the seller after completion until seller’s liability is
assigned to the buyer
b. Fundamental contracts
i. May not want to enter into agreement until they are assigned; OR
ii. Make agreement conditional on assignment (include right to rescind within specified period if not)
1. Buyer will want warranty that seller will not vary terms of contract during period between exchange
and completion (when assignment obtained)
Debtors (A Benefit for a buyer)
When does the debtor relationship exist and cease to exist?
• Exist – when the invoice is issued
• Cease – when all payments under the invoice have been made
Where will the buyer get their information from as regards the process and level of debtors
• As part of the due diligence process buyer will get info re:
o Level of debtors
o Bad debt
o How debt is invoiced
o How debt is collected

What does the buyer receive when taking the book debt?
• The right to receive payment from the 3rd parties
What must the buyer ensure?
• That the book debt is legally transferred (s.136 LPA 1925 notice and in writing) so that the buyer can take action directly against
the debtor

What else might the buyer want?

• Warranty from seller as to:
o Value of debt
o When debt will be collected

Because this will give the buyer a remedy for breach of warranty if the warranties turn out to be untrue

Why might the buyer want to take on the debtors?

• Control over the relationship between the debtors and the business
o May wish to maintain goodwill and prevent seller from pursuing debtors too aggressively which could damage
• Buyer may wish to include undertaking from seller not to commence litigation to retrieve debt for specified
period and to offer buyer chance to buy this debt at end of this specified period

Why might the buyer not want to take on debtors?

• Possibility of defaults
• May be difficult to identify exactly what constitutes book debt
Creditors (A Burden for the buyer)
How can these be transferred?
• Burden can only be transferred by novation
• If chooses to assign then the seller remains liable to pay all creditors
What should the seller ask for if assigning creditors?
1. Undertaking from buyer to pay creditors in timely fashion and in full; AND
2. indemnity from buyer if they fail to pay creditors in such a way
Other Assets and Liabilities
• Only what is listed in the agreement will be purchased
• Sometimes a list of excluded assets is included for certainty

Land and Premises

General considerations
• Freehold and leasehold premises to be transferred will normally appear in a schedule
• Buyer will obtain benefit of implied covenants if seller selling with full or limited title guarantee
• Buyer will assume risk on exchange so should have insurance from this date
o Or ensure landlord does and that buyer’s interest is noted on landlord’s policy

Licence to assign (a lease)

• Requesting consent of the landlord
o Nearly always required
o Will delay so request should be made as early as possible
o s.19 LLTA 1927 states that landlord’s consent must not be unreasonably withheld
o LL must also give decision within reasonable time and give reasons for any refusal (LLTA 1988)

• Guarantees
o LL will demand equivalent guarantees from the buyer of the lease as it has from the current seller
o Lease may stipulate that LL not obliged to consent unless such guarantees are obtained

• Conditional Contract
o If licence to assign not ready in time, parties may make acquisition agreement conditional on the consent of the LL and
incorporate right for either party to rescind within specified time limit should such consent not be given

• Costs of licence
o Current tenant will have to pay
o Rare for this cost to be passed to buyer

Plant and machinery

• Should contain list of plant/machinery included in sale
• Buyer may request additional clause providing that all plant and machinery ‘used in the business’ is to be transferred to guard
against anything the seller forgets and buyer doesn’t spot

• Buyer will assume on exchange of the SPA (or on date of condition being completed i.e. licence to assign) and should have
insurance on the plant/machinery from this date

Buyer will want following from seller:

1. Proper state of repair and condition and in satisfactory working order

2. Are not dangerous, obsolete or in need of replacement
3. Have been properly and regularly maintained
4. Adequate for and not surplus to the needs of the business

Seller should try to:

1. Restrict liability to major defects
2. amend (4) to ‘adequate for and not surplus to the needs of the business as carried on by the seller prior to the agreement’

Intellectual property
• Should contain list of trade marks, service marks, registered designs, copyrights and patents included in transfer

Buyer will want from seller:

1. seller is beneficial owner or registered proprietor of the Intellectual Property Rights (as defined in the interpretation clause)
2. to best of seller’s knowledge and belief those rights are valid and enforceable
3. seller has not granted any person a right to do anything which would otherwise be an infringement of those rights
4. no licences for the use of intellectual property have been granted to the seller or are required to run the business
5. operation of the business does not infringe the intellectual property rights of any other person

6. seller has not disclosed trade secrets, know-how or confidential information except in normal course of business

Leasing, hire-purchase and other finance contracts

• Does not belong to seller (lessee) and cannot be included in the transfer without the consent of lessor
• Lessor may agree to novation (pass lease to buyer) or may prefer a fresh agreement
• If arrangements not in place at completion:
• Contract should make clear that seller responsible for discharging obligations under the agreements until completion,
after which liability shifts to buyer

Stock and work in progress

• Usually provide for stock value to be determined after completion and then added to purchase price and paid
• Specify in contract:
o Who is to carry out valuation,
 Parties may agree to carry out a joint stock take with actual valuation prepared by seller or a professional valuer
o Basis on which valuation to be made
 Same basis as audited accounts?
 Another general basis such as market value?
 In accordance with specific formula that takes account of slow moving/obsolete stock?
o Procedure if parties dispute valuation
 Refer to independent expert?
 Buyer to pay percentage of initial valuation (50%?) anyway with any balance payable after final determination?
• Buyer may set limit on amount of stock it is obliged to purchase
o Both a maximum (to limit costs and prevent excess) and a minimum (to prevent problems with continuing operations)

Buyer may seek warranties that stock:
• of satisfactory quality
• not obsolete or unmarketable

Transferring title
1. Conveyances, transfers or assignments of land and premises
2. Assignments of goodwill, certain intellectual property rights and the benefit of contracts
3. Stock etc is transferred on delivery

Documents to be handed over by seller on completion

1. Documents transferring title to assets
2. Deeds and documents of title to assets such as freehold and leasehold properties
3. Financial records and books of account, customer lists, programs, designs, drawings, plans, sales and promotional materials,
national insurance, PAYE and VAT records, employee records and other docs required to run the business
4. Duly executed releases of charges over the assets and confirmation of non-crystallisation of floating charges
5. Originals, counterparts or certified copies as appropriate of licences to assign leasehold property, novation agreements and
consents from third parties to assignment of contracts etc
6. Certified copy of special resolution of selling company resolving to change its name
7. Where seller is a company; a board resolution authorising a representative to sign the documentation
Corporation tax
1. Capital gains
2. Income profits on sale of trading stock and intangible fixed assets
3. Balancing charges (for capital allowances on plant and machinery)

• A small company selling its business may push it into the higher Corporation Tax band, though can claim exemption if it
reinvests into replacement business assets
• Right to carry forward trading losses is lost when business is sold

Extracting the cash from the company

Business Sale

Share sale
Liquidating the company
• Shareholders may extract money by putting company into voluntary liquidation
• Shareholders will be treated as disposing of their shares and:
o individual shareholders will be liable to CGT
o corporate shareholders will be liable to Corporation Tax
• Potential double charge where sale of business:
o 1 charge to Corporation Tax on disposal of the business
o 1 charge to CGT on winding up

Distribution by dividend
• Company may declare one before putting into liquidation
• Double charge for individual shareholders again
Implications for the buyer of a business

Capital Allowances
• Not restricted to purchase of new assets
• Buyer will be able to claim allowances for the assets he obtains from the seller
• Price will be what buyer paid for them, not what their WDV is
o The seller will be subject to a balancing charge, however, if it sells the asset for more than its WDV

Trading stock
Amount paid by buyer will be deductible expense when working out income profits

Base cost for capital tax

• Business acquisition: Price paid by buyer for assets
• Share acquisition: Original price paid by target for assets

Roll-over relief from CGT (or corporation tax) on replacement of qualifying assets
• If buyer has disposed of any qualifying assets in previous 3 years or is intending to in next 12 months then any gain on disposal
can be rolled over into the cost of the acquisition

Apportioning the purchase price between the assets

• Will impact on what tax and stamp duty is payable
• s.52(4) TCGA 1992 says this must be done in a ‘just and reasonable’ fashion
• Buyer may prefer balance in favour of:
o goodwill as doesn’t attract stamp duty
o stock as can deduct this from income profits
o plant and machinery for the capital allowances
• Seller may prefer balance in favour of:
o Qualifying assets so can take advantage of roll over relief
o Stock, plant and machinery if seller currently has unrelieved trading losses

• Will always depend on facts

Is VAT Chargeable?
• Art 5 VAT (Special Provisions) Order 1995 – where transferring as going concern, transaction will be VAT exempt
• If just several assets then VAT must be levied – s.4(1) VAT Act 1994
Transfer as going concern
2 conditions must be satisfied:
1. assets must be used by buyer in same kind of business as that carried on by seller and with no significant break
2. buyer must be a taxable person, or become a taxable person as result of the transfer

Take into account the following:

• wording of acquisition agreement (though not conclusive)
• whether goodwill, right to use name, customer lists and contracts are transferred
• whether workforce is transferred
• whether buyer can carry on same activities without interruption
• where part of business is transferred, whether it is a severable unit, capable of standing on its own

HMRC will only give an opinion of whether is within Art 5 or not where transaction has unusual characteristics

Provision in the acquisition agreement

• Must state that sale is exclusive of VAT, otherwise if HMRC decide is outside scope of Art 5 then VAT will be deducted from the
price, meaning seller receives far less – s.19(2) VATA 1992
o Because seller will have to account to HMRC for tax from the sum it receives
• If VAT is wrongly added to the price and actually transaction falls within Art 5 then buyer may only have right against the seller
and will not be able to recover from HMRC

Stamp Duty
Rate of duty
• <£125,000 (<£150,000 for commercial property) – No Tax Payable
• >£125,000 <£250,000 – 1% of purchase price
• >£250,000 <£500,000 – 3% of purchase price
• >£500,000 – 4% of purchase price

• Where acquiring a business, must aggregate total value of all property and assess duty in this way
• Finance Act 2006 states that where partnership property includes land, there will be no stamp duty payable on transfer of interest
in partnership, so long as partnership’s main activity is profession or trade (other than developing land)

Financing the acquisition by borrowing: is tax relief available?

Individual buyer
• Interest payments on loan can be deducted from income; OR
• Can be deducted from total profits of partnership – ICTA 1988 s.362
Corporate buyer
• Relief on interest payable is normally available as deductible expense under Finance Act 1996 loan relationship legislation
• When acquiring a business, the buyer will not also inherit tax liabilities so no warranties needed in this regard
• Only warranties will be to elicit info re: any concessions or dispensations agreed between seller and HMRC
• Buyer will also seek warranties that PAYE, NI and VAT records are up to date
Things to check in the SPA

1. Parties
a. Does the business being sold have a separate legal identity or is the parent company the party (seller) to the contract?
2. Definitions
a. Do they match what is intended to be transferred as suggested by any heads of terms
i. Do IP rights need to be removed from goodwill?
b. Do the Schedules referred to match and represent what is intended to be transferred
3. Agreement for sale
a. Is it intended to be sold as a going concern and expressed correctly as such?
b. Are the assets listed correct?
i. Are there things in there that shouldn’t be or are the definitions of some of them too wide (see above)
c. What are the excluded assets as listed and are these comprehensive of what the buyer doesn’t want to acquire
4. Consideration
a. Correct value?
b. Expressed to be exclusive of VAT?
c. How are creditors dealt with:
i. How are they defined – correct?
ii. Value attributed to them correct?
d. How is consideration to be apportioned – considerations above should be addressed i.e. conflicting opinion between
buyer and seller as to how to apportion
5. Completion
a. What must be done?
b. What docs need to be produced?
i. Is there a clause requiring ‘any other docs that buyer reasonably demands’ as a condition  too wide and too
ii. Is the selling party changing the name/keeping the name  resolutions?
1. who is actually changing name, if so – check parties to agreement and how in fact is agreeing to
change name
6. Contracts
a. Provisions for where they cannot be transferred?
i. Buyer undertake to perform as agent and indemnify if not
b. ‘best endeavours’ to ensure transfer too onerous?
7. Creditors and liabilities
a. If not assigned then buyer undertakes to pay and indemnify seller if not?
8. Name
a. Is seller agreeing to change?
b. If so, is it actually the selling party to agreement or a division of it that is agreeing to change?
9. Restrictive covenants
a. Too wide?
b. Too onerous?
c. Too long in years?
d. Protecting goodwill is the aim
10. VAT
a. Is it deemed to be excluded?
i. If so and HMRC deems it not to be excluded under Article 5 then seller will have to account so seller should
demand indemnity for any tax that HMRC chooses to levy
• Each company = separate legal identity and limited liability
o Parent company not liable for debts of subsidiaries unless agrees to assume responsibility or there are special
• Allows risky enterprise to be packaged into separate entity so any failure would not impact too heavily
• Often less cumbersome as can clearly divide management and parts of the business
• Also greater flexibility in acquisitions and disposals since easier to transfer entire subsidiary than a part of a business
• Capital gains advantages
• Other taxation advantages e.g. reliefs, stamp duty

• Cost and hassle of maintaining separate statutory books and having separate annual accounts audited etc

• Positives are that groups treated as single entity so intra-group transfers don’t give rise to tax
• Disadvantages:
o Group must meet various conditions to benefit from advantages
o Pitfalls in obtaining relief i.e. not making claims and elections in specified time limits
Benefits of capital losses cannot be transferred between members of the group

Definition of a Group for purposes of Capital Gains provisions

• s.170 TCGA 1992:

1. All 75% direct subsidiaries of principal will be part of the group; AND
2. All 75% sub-subsidiaries so long as they are also ‘effective 51%’ subsidiaries of the principal
a. i.e. B = 75% subsidiary of A
C = 75% subsidiary of B therefore a ‘75% sub-subsidiry’

• ‘effective 51% subsidiary definition – Sch 18 ICTA 1988

o principal company must be beneficially entitled to:
 more than 50% of any profits available for distribution to equity holders of the subsidiary; AND
 more than 50% of any assets available for distribution to equity holders on a winding up

• i.e. B = 75% subsidiary of A

C = 75% subsidiary of B, THEREFORE

(75/100) x 75 = 56.25% and is an effective 51% subsidiary

Capital losses
• Possible to transfer these across intra-group indirectly
• Example:
o B and C wholly owned subsidiaries of A
o C has capital losses of £50,000
o B proposes to sell premises to D to realise a capital gain of £30,000; INSTEAD:

o B sells premises to C (intra group so no charge to corp tax)

o C sells premises for £30,000 to D
o C’s capital gain of £30,000 is set against its loss of £50,000 leaving only £20,000 to carry forward
• HMRC allows B to sell premises to D and state that should be treated as if transferred to C immediately before disposal and C
• Not allowed to simply bring in a company to group, transfer premises and get them to dispose of it simply to avoid charge to
corporation tax – TCGA 1992 s.177A
Transferring capital assets and Capital Gains
No gain/no loss transfer
• Transfer of assets intra-group will not give rise to a charge to corporation tax – s.171 TCGA 1992
• Tax will not be levied until the asset is disposed of outside of the group

Exit charge on company leaving group (accrues on 1st day of Accounting period in year asset sold)
• If company that receives asset then leaves group within 6 years then there will be an exit charge/degrouping gain/loss – s.179
TCGA 1992
• The company leaving the group will be deemed to have sold the asset it received immediately after receiving it for the value it
received it for, and then immediately re-acquiring it
• Company leaving group will be responsible to pay the tax but person buying the company will require a tax indemnity from the
• Example:
o A buys land for £100,000 in 2002
o A transfers the land to wholly owned subsidiary B in 2003 for £150,000 (MV)
o B transfers the land to wholly owned subsidiary C in 2005 for £250,000 (MV)
o C leaves the group in 2007
o C is treated as disposing of the land in 2005 for £250,000 then immediately re-acquiring it
o Calculation =
 Proceeds of sale: £250,000
 Cost of acquisition: £100,000
 £100,000
• Reliefs:

1. Existing company can, with agreement from another company in the group, elect to transfer the exit charge to that other
company in the group – s.179A TCGA 1992
a. If the exit charge gives rise to a loss, this loss can also be transferred in the same way

2. Exiting company can claim roll-over relief if it re-invests in qualifying business assets – s.179B TCGA 1992
Transferring an asset out of the group
• Gives rise to charge to corporation tax
• Calculation =
o Gain made on sale
o Cost of acquisition by member who first brought asset into group

Sale of shares
• If seller is a company then likely to be exempt from CGT as result of disposing of substantial shareholding in trading company

Stamp Duty
• Can be avoided on intra-group transfer provided one company is a 75% subsidiary of the other or both are 75% subsidiaries of a
third – s.42 Finance Act 1930 (as amended)
• Rates on land (paid by buyer)
• <£125,000 (<£150,000 for commercial property) – No Tax Payable
• >£125,000 <£250,000 – 1% of purchase price
• >£250,000 <£500,000 – 3% of purchase price
• >£500,000 – 4% of purchase price
• Rate on shares:
o 0.5% to nearest £5 (rounded upwards)

Definition of a Group for purposes of other reliefs

• Membership of groups defined by percentage of ordinary share capital held by the parent
• 3 types of subsidiary – s.838 ICTA 1988:
o 51% - parent must own over 50%
o 75% - parent must own not less than 75%
o 100% - parent must own all
• Also ‘economic ownership tests

‘Ordinary share capital’

• Wide definition
o All issued share capital of company (whatever it is called
• Does not include:
o Capital, the holders of which have a right to a dividend at a fixed rate but no other right to share in the profits of the
company – s.832(1) ICTA 1988

‘Owned directly or indirectly’

• Indirect = ownership through another company

Beneficial ownership
• Parent company must retain beneficial ownership of appropriate share percentage in other company


• If a parent company enters into unconditional contract for sale (or conditional where condition can be waived by buyer) for entire
share capital of a subsidiary ceases to have beneficial ownership
o Any intra-group transactions should be completed before this stage to take tax advantages

Economic ownership tests

• To prevent artificial groups
• Must also be satisfied to come within one of the 3 ownership types – Sch 18 ICTA 1988
• Must fulfil 2 requirements:

1. Be beneficially entitled to
a. more than 50%; OR
b. not less than 75%; OR
c. 100%

of the profits available for distribution to equity holders of the subsidiary; AND

2. Be beneficially entitled to:

a. more than 50%; OR
b. not less than 75%; OR
c. 100%

of any assets of the subsidiary available for distribution to equity holders on a winding up

Summary of how to qualify as group

1. Parent must beneficially own either:
a. more than 50%; OR
b. not less than 75%; OR
c. 100%

Of the ordinary share capital of the subsidiary; AND

2. Parent must be beneficially entitled to

a. more than 50%; OR
b. not less than 75%; OR
c. 100%

of the profits available for distribution to equity holders of the subsidiary; AND

3. Be beneficially entitled to:

a. more than 50%; OR
b. not less than 75%; OR
c. 100%

of any assets of the subsidiary available for distribution to equity holders on a winding up
Group Relief – s.402 ICTA 1988
General tax reliefs (not group specific)

Section of When will the loss have Against what will the loss be Which AP(s) are relevant?
ICTA 1988 occurred? set?
S393A Any AP of trading The company’s profits The AP of the loss and,
carry-across/ (income and capital) thereafter, the AP(s) falling in
carry-back the previous 12 months
S393A The final 12 months of The company’s profits The AP of the loss and,
terminal trading (income and capital) thereafter, the AP(s) falling in
carry-back the three years previous to the
relief final 12 months of trading
(take later periods first)
S393(1) Any AP of trading Subsequent profits from the Subsequent AP(s) until the
carry- same trade loss is absorbed

Nature of Group relief

• Only applies to income losses
• Surrendering company (one that has suffered trading loss/charge to income profits etc) can surrender these to:
o Claimant company

• Claimant company sets these losses against its own taxable profits thus reducing its liability to corporation tax
o Claimant company must first deduct its own loses and charges before accepting the surrendering company’s

• Surrendering company can only surrender losses from current accounting period and claimant company can only set them against
profits from the corresponding period
• Possible to surrender different amounts to different members of the group

Applicable groups
• 2 companies where one is 75% subsidiary of the other; OR
• 3 companies where 2 are 75% subsidiaries of the 3rd – s.413(3) ICTA 1988
• Generally both surrendering and claimant company should be resident in UK though in limited circumstances, companies may
claim relief for losses incurred by subsidiaries resident in the EEA – Marks and Spender plc v Halsey (Inspector of taxes) [2007]
• Example:

How it could work in practice

a. A ltd owns 100% in B ltd
b. Both have same ARD
c. A makes £150,000 profit
d. B makes a £50,000 loss
e. B could either:
a. Carry loss back under s.393A ICTA 1988; AND/OR
b. Carry loss forward under s.393(1) ICTA 1988; OR

c. Surrender all or part of the £50,000 loss to A, this reducing A’s profits to £100,000 and reducing A’s payment to tax

Companies joining or leaving the group

• Group relief should be apportioned when a company joins or leaves a group during an accounting period – s.403A – 403C ICTA

‘Arrangements’ for a company to leave the group

• Company about to suffer loss cannot join unconnected group, surrender losses and then depart the group – s.410 ICTA 1988
• Company will not be regarded as member of the group if ‘arrangements’ are in existence to transfer that company to another
group and group relief will not be available while such arrangements are in place – Shepherd (Inspector of taxes) v Law Land plc
• In acquisition:
o Relief for losses generally only available if losses arose before ‘arrangements’ were in place for sale of the target
• No exact definition of when arrangements will be in place, HMRC gives guidance:
o Signing of heads of agreement may be enough to constitute arrangements (does not need to be fully binding contract)

o On normal sale of company, arrangements not in place until acceptance (subject to contract or similar condition) of the
offer; OR

o Where disposal of shares requires shareholder approval, arrangements not in place until such approval is given or
directors are aware it will be given

o Arrangements might exist if there is an ‘understanding between the parties in the character of an option’ for a potential
buyer to acquire shares
Transfer of Undertakings (Protection of Employment) Regulations 2006
When will TUPE apply
To relevant Transfers – Reg 3

What is a Relevant Transfer?

• TUPE will only apply to a relevant transfer, defined at Reg 3(1)(a):
o “Transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in
the UK...
o another person where there is a transfer of an economic entity which retains its identity”
• Economic entity defined in Reg 3(2) as:
o “organised grouping of resources which has objective of pursuing an economic activity, whether or not that activity is
central or ancillary”

Essentially – must be a going concern

• Relevant transfer also means, under Reg 3(1)(b):

o Service provision change where cleaning, catering etc are contracted out
• Service provision change will be covered by TUPE where Reg 3(3) applies, that is:
o “Immediately before service provision change...
 ...there is an organised grouping of employees situated in GB which has as its principal purpose the carrying out
of activities concerned on behalf of the client; AND
 ...the client intends that the activities will, following the service provision change, be carried out by the
transferee other than in connection with a single specific event or task of short term duration; AND
...The activities concerned do not consist wholly or mainly of the supply of goods for the client’s use”

Can parties agree to exclude TUPE?

• No - Reg 18

What if TUPE doesn’t apply

• Employees must make their claim against the seller
• If seller is insolvent, awards under redundancy and basic award for unfair dismissal will be met by the Secretary of State for
Employment – s.182 ERA 1996

Person must satisfy qualifying criteria

One year’s continuous employment
What effect will a relevant transfer have? – Reg 4
(1) Automatic transfer of contracts of employment
Reg 4(1)
• relevant transfer will not terminate contract of employment
• transfer will act as though original employment contract was actually between employee and transferee
Reg 4(2)
On completion of relevant transfer:
• Transferor’s rights, powers, duties and liabilities re: the employment contract shall pass to the transferee
• Any act/omission before transfer completed, of or in relation to transferor re: the contract or person shall be deemed to have been
act or omission of or in relation to transferee

(2) Which employees are affected?

Basically – those employed immediately before the transfer and those dismissed incorrectly under Reg 7(1)

Reg 4(3)
Any reference to a person employed by the transferor and assigned to the organised grouping of resources or employees that is subject
to a relevant transfer, is a reference to a person so employed immediately before the transfer, or who would have been so employed if
he had not been dismissed in the circumstances described in regulation 7(1)

‘Immediately before the transfer’

• If there is a gap between exchange of contracts and completion, it is the date of completion which is date of transfer for purposes
of Reg 4
• Reg 4 also applies to employees who would have been employed immediately before but for dismissal undr Reg 7(1)
o Dismissal automatically unfair unless employer can show it was for economic, technical or organisational reasons (ETO)

Employees whose contracts would ‘otherwise be terminated by the transfer’

• Employees whose contracts would not be terminated by the transfer do not come within reg 4:
o Employees who are retained by transferor and re-deployed in accordance with their contract
o Where part of business is transferred and employee does not work in that part

Summary of who Reg 4 Applies to

1. Employees actually employed by transferor in part of business being transferred at time of transfer; AND
2. Employees dismissed for reason connected with transfer where no ETO reason exists
a. Rights for any wrongful/unfair dismissal and any redundancy claim will transfer with business to transferee

Employee’s right of objection - Reg 4(7)

• TUPE will not apply where employee objects
• Contract will be terminated but employee will not be treated as being dismissed by transferor – Reg 4(8)

Rights and liabilities which are not assigned under the regulations
• Criminal liabilities
• Rights and liabilities relating to provisions of occupational pensions schemes which relate to benefits for old age, invalidity or
Dismissal of an employee resulting from a relevant transfer – Reg 7
• If for reason connected with transfer then automatically unfair and gives automatic right to unfair dismissal claim (though must
still fulfil statutory qualifications i.e. 1 years continuous employment) – Reg 7(1)
o unless ETO justification – Reg 7(2)

When is dismissal for reason connected with transfer?

• Question of fact
o Closer to transfer easier to prove
o If can prove dismissal was at time when transferee had been found and dismissal was connected to transfer under
• Less easy to prove if in connection with transfers generally – conflict of EAT decisions
o Ibex Trading Co Ltd (in administration) v Walton – actual transferee had to have been identified
o Morris v John Grose Group Ltd – ‘the transfer’ in reg 7(1) did not have to refer to specific transferee

o Morris is preferred by ECJ

• Where clear evidence of pre-transfer collusion between transferor and transferee this may lead to finding that dismissals are
o Wheeler v Patel – Mrs Wheeler dismissed from job in order to achieve agreement from buyer to transfer

Establishing an ETO reason (essentially have to show a genuine redundancy situation)

• If transferor can establish one then will have deemed to dismiss for redundancy or some other substantial reason – s.98(1) ERA
o Must still satisfy Employment Tribunal that acted reasonably – s.98(4) ERA 1996
• Scope of defence limited:
o To be an Economic reason within Reg 7(2) the reason must relate to conduct of business and not simply to achieve
enhanced price or to achieve agreement for sale – Wheler v Patel
• Simply saying someone is overpaid is not enough, especially if for benefit of buyer
o To come within Reg 7(2) the reason must entail a change in the composition of the workforce or substantial change in
job description i.e. genuine redundancy situation
 Change in function = OK
 Change in terms and conditions enjoyed by workforce = NOT OK
• Simply saying someone is overpaid is not enough
• Transferee who provokes actual or constructive dismissal by attempting to change terms and
conditions of transferring employees to harmonise with existing workforce would be unable to rely on

Changes to terms of employment

• Will be void if reason is transfer itself or reason connected with it unless ETO reason can be shown – Reg 4(4)
• Variations may be permitted on collective basis where transferor is subject to relevant insolvency proceedings – Reg 9
o Permitted variation – designed to ensure survival of transferred undertaking
• Right to claim constructive dismissal preserved – Reg 4(11)
• Employees can resign if transfer results in substantial material detrimental change to working conditions – Reg 4(9)

What the buyer should check and what they should do to protect themselves
Things to check
• List of employees
• Their terms and conditions of employments
o Examine contractual terms since will be little scope to vary without employee consent
• Transferee should seek indemnity from transferor if due diligence shows terms and conditions different from those proposed in
the transfer
• Transferee wishing to change/harmonise should get transferor to dismiss employees (rarely effective to prevent liability passing to
o Will be effective but will give rise to unfair dismissal claim unless ETO reason
 Mere change in conditions does not constitute ETO reason

Protections in the acquisition agreement

• Warranties:
o List of employees is correct and accurate
o Their terms and conditions are correct and accurate
o No employment claims pending
o No events that may give rise to constructive dismissal claim
• Indemnities
o Costs or liabilities arising out of all outgoings in respect of employees up to date of completion (salary, commissions,
bonuses and holiday pay)
o Claims attributable to any breach by seller of employment obligations prior to completion (including claims relating to
termination of any employees’ employment)
• May expressly acknowledge that the transfer is a ‘relevant transfer’ for TUPE purposes
• Best practice if wishing to change terms = take on employees on current terms, wait a while then conduct dismissals to avoid
them being construed as connected to transfer
o Hen negotiating purchase price, take into account liability that transferee will incur in dismissing and reduce price

What the sellers may want to protect themselves

• Reduction in purchase price if it restructures company on request of buyer before completion and has to pay compensation to
those dismissed
• Will want to disclose any restructuring or dismissals made before completion
Wrongful dismissal – Contract Law
• What it is
o Common law claim based on termination of contract in breach of contract
 e.g. termination on no/inadequate notice or before fixed term expired/constructive dismissal
o In fixed term contract without break clause, to terminate early would result in wrongful dismissal
o Notice periods generally expressly agreed in contract
 Unless employee has committed repudiatory breach i.e. gross misconduct (in which case statutory minimum
does not apply), must be at least same length as specified in s.86 Employment Rights Act 1996
• 1 week after 1 months’ employment
• 2 weeks after 2 years’ continuous employment
• 1 additional week for every additional year up to max of 12 weeks after 12 years
 Where not specified, employee entitled to ‘reasonable’ notice (case-by-case but longer for more senior
o Employee must also give same notice if wants to leave and not to would breach contract

o Constructive Dismissal
 If employer committed repudiatory breach of express/implied term of contract then employee can treat contract
as discharged and leave without notice AND bring claim of wrongful dismissal
• Employee must leave within reasonable period of employer breach otherwise deemed to have affirmed
• Repudiatory breach = unilaterally altering contract/breaking implied duty of good faith e.g. by
humiliating employee in front of colleagues, imposing unreasonable work demands...
• Employers defence
o Employee commits repudiatory breach such as revealing confidential info
o Can use defence even if didn’t know of breach at time of dismissal

• Damages (bring claim in High Court, County Court or Employment Tribunal)

o Put employee in position would have been had contract not been broken (so far as money can do this)
 Indefinite contract
• Wages would have earned if notice had been given properly
 Fixed term
• Wages would have earned across remaining period
o First £30,000 is tax free –ss.148 and 188 ICTA 1988
o Can also claim for lost fringe benefits:
 E.g. pension rights or company car
o Pecuniary basis so cannot generally claim for loss of future prospects or injured feelings

o Employee under duty to mitigate loss

 Take reasonable steps to obtain suitable employment
 Won’t obtain damages for:
• Mitigated losses; OR
• Losses which would have been mitigated but for breach of duty to mitigate

o Where employer makes payment in lieu of notice, this will be deducted from damages
o If dismissal and disciplinary procedures or grievance procedures were not completed before tribunal started:
 Mainly employee’s fault – damages reduced 10-50%
 Mainly employer’s fault – damages increased 10-50%

Unfair Dismissal - Statute

• What it is
o S.94 Employment Rights Act 1996 gives right not to be unfairly dismissed
o Claim bought before employment tribunal
 [FIRST] – Employee:
• Must prove ‘qualifying employee’
• Must have 1 years continuous employment to date of dismissal
• Must prove has been dismissed
• Actual dismissal with or without notice; OR
• Constructive Dismissal (repudiatory breach by employer)
 [SECOND] – Employer
• Must show principal reason for dismissal is one of 6 permitted reasons:
1. Lacking capability and qualifications for doing job employed to do
2. Conduct within employment
a. outside behaviour only relevant if has bearing on ability to do job
3. Redundancy
a. Employee entitled to redundancy payment
b. Can still be used as a reason, even if employee didn’t qualify under the redundancy
head i.e. was not a qualifying employee having 2 years service
c. Employer must show acted reasonably in making that person specifically redundant
i.e. ‘last in first out’, and that reason falls under one of following:
i. Complete closedown
ii. Partial closedown
iii. Overmanning
4. Could not continue to work without contravening a statutory enactment
a. e.g. lorry driver lost driving license
5. other substantial reason
a. e.g. employee refuses to accept reorganisation affecting working hours
b. e.g. personality clash between employees
6. retirement if over 65 and conforms to procedural requirements:
a. inform employee of retirement date; AND
b. inform employee of right to request to work beyond that date
• [THIRD] – Tribunal
o If employer proved one of above, tribunal must decide whether was reasonable for employer of their
size and administrative resources to treat as sufficient reason for dismissal – s.98(4) ERA 1996, taking
into account:
 Equity
 Substantial merits of case
 Whether employer had genuine and reasonable belief in facts based on reasonable
investigation and procedure leading to reasonable decision
 Size of business
o Capability Case
 Warn employee about standard of work in writing
 Give chance to improve
 Possibly additional training and supervision
 Possibly should have moved to job capable of doing
o Conduct Case
 Thorough investigation
 Conduct must be gross or persistent
 Consult ACAS Code of Practice which recommends system of warnings for less serious
• No force in law but will be taken into account by tribunal
o Redundancy case
 Warn and consult employee
 Adopt fair basis i.e. ‘last in first out’
 Give correct notice (or payment in lieu) to avoid unfair dismissal and/or wrongful dismissal

• Employers Defence
o If based on misconduct, cannot rely on misconduct they discovered after the dismissal, though the tribunal may reduce
compensation payable

• Remedies
o Reinstatement or re-engagement
 Same job or comparable job with same or associated employer
 Employee must ask for this remedy
 Rarely used
o Compensation
 Basic Award
1. Final weekly gross pay x length of service (max of £310 per week and 20 years)
2. Multiplier depending on age during those years of service:
a. 41and above = x11/2
b. 22 to 40 = x1
c. Below 22 = x1/2
3. Can be reduced due to employee’s contributory fault
4. CALCULATION = Length of service X multiplier X weekly gross salary

 Compensatory Award
• Such as tribunal considers just and equitable as consequence of employer dismissing up to maximum
of £60,600
• Calculated under following heads
o Immediate loss of net wages from date of dismissal to hearing (assuming has not got another
job yet)
o Future loss of net wages (how long may take to get new job?)
o Loss of fringe benefits
o Loss of statutory protection (will have to rebuild against a new employer his rights to
redundancy payment etc
• Tribunal will deduct any payments made by employer in lieu of notice or ex gratia
• Can be reduced due to employee’s contributory fault

o If dismissal and disciplinary procedures or grievance procedures were not completed before tribunal started:
 Mainly employee’s fault – damages reduced 10-50%
 Mainly employer’s fault – damages increased 10-50%
Redundancy - statute
• Paid by employer
• Should be reasonable i.e. consult employee and offer alternative employment in company
• If fails to pay or calculation disputed, refer to tribunal within 6 months
o [FIRST] – Employee:
 Must prove ‘qualifying employee’
• Must have 2 years continuous employment to date of dismissal
 Must prove has been dismissed
• Actual dismissal with or without notice; OR
• Constructive Dismissal (repudiatory breach by employer)
• Failure to renew fixed term contract on expiry

o [SECOND] – Presumption of redundancy

 Employer may be able to show alternate reason but this opens door to unfair dismissal
 Check if reason for dismissal fits statutory def of redundancy:
• Complete closedown of business or part of business for which employee employed
• Partial closedown of business where employee employed
• Overmanning or change in type of work undertaken
 Must show reasonable to dismiss that specific person i.e. last in first out
o [THIRD] – if fits definition, employee has prima facie right to payment
 If unreasonably refuses offer of suitable alternative made by employer, may lose right
 Calculated in same way as basic award for unfair dismissal
• Final weekly gross pay x length of service (max of £310 per week and 20 years)
• Multiplier depending on age during those years of service:
o 41and above = x11/2
o 22 to 40 = x1
o Below 22 = x1/2
• Can be reduced due to employee’s contributory fault
 CALCULATION = Length of service X multiplier X weekly gross salary

Overlapping claims
• If dismissal unfair and without proper notice (or within fixed term) then employer may claim both unfair dismissal and wrongful
o Compensation not awarded for same loss twice
 Compensation for immediate and future losses under unfair dismissal will reduce damages for wrongful

• May also claim redundancy and unfair dismissal

o Claim the basic award from Redundancy and the Compensation element from Unfair Dismissal
o Where unfairly selected for redundancy
o If redundancy award e exceeds unfair dismissal award (because of employee conduct in dismissal) then the balance will
reduce compensatory award

incl SPTs and Personal interest issues

MBOs and PE

• MBO = target acquired by some or all of management through Special Purpose Vehicle (‘Newco’) established for this purpose
• MBO can be share or business acquisition and may involve hive-down
• MBI = external management team brought in
• BIMBO = ‘Buy-in Management Buy out’ i.e. combination of MBI and MBO

Process of a PE transaction
1. Investment Paper put together
a. PE fund will investigate potential target using the key assumptions as basis
2. Investment committee approve ‘in principle’
a. Committee considers proposal (strengths, weaknesses, potential pitfalls)
b. Test against key assumptions and PE fund-specific criteria
3. Investment offer made to target
a. If accepted, negotiation of terms starts
4. Final investment committee approval
a. By this stage the Ts and Cs will have been finalised
Completion of investment

• usually combination of debt and equity
• Managers will prepare plan to attract PE and Venture Capitalists
• Will often involve several PE houses bidding to be involved
o At start of due diligence process there will be auction process
• Additional documentation required:
o Investment Agreement between managers and PE provider
• More people involved:
o Management and Lawyers
o PE and Lawyers
o Banks and Lawyers

PE Investors’ Analysis of proposed acquisition (Key Assumptions)

1. Internal Rate of Return (IRR) and investment multiple
a. Investors in the PE fund will want IRR of 30%+ per annum
b. Investors in PE fund will want 2x investment multiple

2. Exit
a.Generally looking to realise investment 3-5 years from outset by:
i. Sale’ OR
ii. IPO; OR
iii. Secondary buyout by another PE investor
3. Good management team
a. PE fund will want non-exec majority, usually
b. Will reserve right to put in their own management team
4. Control (see below)
Security and Control
• PE will want control because:
o Will likely be minority shareholders both at member and board level

• PE will secure investment by taking mixture of:

o Ordinary shares; AND
o Redeemable preference shares; AND
o Loan notes

• PE will exercise control by:

o Often insisting on majority shareholding
o Controls on management team through provisions in
• Investment agreement (most important)
o Relates to relationship between PE and Investment Vehicle (NewCo1)
• Newco articles of association (next most important)
• Representation at board meetings
• Managers’ service contracts
• Acquisition agreement between Purchase Vehicle (NewCo2) and Parent of target

Will take fewer controls if has majority shareholding

o Reserving right to put in its own management team in place of existing

• Acquisition documentation, specifically the articles of Newco, will deal with realisation:
o Exit provision for 3-5 years down the line by:
• Flotation (usually most desirable); OR
o Common for provision to allow redeemable preference shares to be converted to ordinary
shares prior to them being admitted on the Stock Exchange
o Should allow for drag-along/tag-along rights
o Provisions for protection of PE investment since will likely be minority shareholder
• Further buy-out; OR
• Sale of Newco
• Warranties
o Given by Sellers to NewCo2
• Sellers likely to be managers of NewCo2, too)
o Given by NewCo1 to PE
o Sellers will resist extensive warranties as buyers likely to have more knowledge about business generally; THOUGH
o They should be prepared to give full warranties
o Specific warranties:
• By management team of their business plan
• Key information acquired through due diligence

Other considerations – confidentiality during due diligence

• Selling company (parent of subsidiary being bought) will want confidentiality agreement from the Bank which is investing in
NewCo2 that it will not release any info passed to it during due diligence
o Because this would damage the value of the subsidiary and thus the value of it to the parent
• Directors of the selling company will have to ask for waiver of confidentiality agreements in their service contracts so they can
disclose certain information to the bank
o Duties of confidentiality in service contracts?
o Fiduciary duty to act in best interests of the company
o s.172 CA06 duty to promote the success of the company and by releasing information may damage it

Articles of Association of SPV (Newco)

• Separate classes of shares to reflect terms
• Ratchet (additional reward to management if successful exist with targets achieved)
• Voting rights
• Preference shares

Share transfers
• Prohibited transfers
o Of shares by management to incentivise them to work hard in making the business successful

• Permitted transfers
o Transfers that can be done without prior need for consent e.g. PE to other member of its group
o Management to family members or trust

• Pre-emption
o Check if there are any pre-emption rights for 3rd parties either under s.89 or in articles

• Leavers
o If management member leaves they will normally be required to sell their shares in prescribed manner and at
prescribed price.
o Price will depend on whether they are a good or bad leaver:

 Good Leaver
• Price of shares will be MV at date of proposed transfer

 Bad leaver
• Lower of value at date of transfer or issue price

• Drag along rights

o Right for PE shareholder to require other shareholder to sell to third party who has made offer to that shareholder

• Tag along rights

o Right for a shareholder to sell its shares to a third party who has made an offer to buy the shares of another

Buyer must buy same proportion of minority shareholder shares as they do PE shareholder

• Payment In Kind (PIK) notes

o Mirror effect of class rights of preference shares but are more tax efficient

Priority for payment on exit

1. Senior debt provided by Bank
2. Mezzanine finance provided by Bank
3. Loan notes issued to investors
4. Shares issued to investors

The Investment Agreement

• Will contain warranties by the executives of the selling company
o Is this fair that they make the reps?
 Yes – they do have the most info
 No – The dirs making the reps take all the risk whereas it is the parent which
takes the consideration

• Dirs of purchase vehicle should have regard to the following dates:

o Expiry date of warranties they have made to the PE
o Expiry of warranties made by the seller in the SPA because don’t want to remain on the
hook for warranties given to the PE when the other warranties may have expired already
and no comparative claim can be made

• Exit provisions
o Protection of investment (including drag-along and tag-along)
Some procedural requirements for corporate sellers and buyers
Compliance with the constitution
1. Objects in seller’s memo must allow sale of business
2. Notice, Conduct and Quorum requirements in articles must be complied with
3. Article may simply allow directors to conduct under TA70 or they may need member consent

Personal Interest Issues

Interests of employees
4. s.172 CA06 – directors must have regard to interests of company employees
o duty owed to company (to have regard to its employees) so only company can enforce it (or member through derivative

Directors’ interests in the acquisition agreement

• Directors of selling company who are acquiring business may have personal interest if they manage the business being sold:

1) Duty on Director to declare personal interest (CA06 s.177)

a) Make declaration at a BM (s.177(2)(a)), OR
Though Dir can vote to call a GM at
b) By notice in accordance with: (s.177(2)(b)) which the matter that he has a personal
i) s.184 – in writing interest in will be voted on
ii) s.185 – general notice
2) Director precluded from voting on matter where he has a personal interest (CA85 TA94)
a) Exceptions i.e. where the Dir can vote even though has personal interest:
i) Resolution relates to him giving guarantee, security or indemnity in respect of money lent to, or obligation incurred by
him for the benefit of the company or any of its subsidiaries (CA85 TA94(a))
ii) Resolution relates to him giving a third party a guarantee, security or indemnity in respect of an obligation of the Co. or
any of its subsidiaries for which the director has assumed responsibility in whole or part and whether alone or jointly
with others under a guarantee or indemnity or by the giving of security (CA85 TA94(b))
iii) His interest arises by virtue of his subscribing or agreeing to subscribe for any shares, debentures, or other securities of
the company or any of its subsidiaries, or by virtue of his being, or intending to become, a participant in the underwriting
or sub-underwriting of an offer of any such shares, debentures or other securities by the Co. or any of its subsidiaries for
subscription, purchase or exchange (CA85 TA94(c))
iv) The resolution relates in any way to a retirement benefits scheme which has been approved or is conditional upon
approval, by the Board of the Inland Revenue for taxation purposes (CA85 TA94(d))

***A Dir can still vote on his own service contract***

Substantial Property Transactions

• Look at the transaction from the POV of both the seller and the buyer
• It may also be an SPT:
o The following SPTs require members’ approval by OR or need to be conditional on such approval (CA06 s.190(1))
 Dir of Co/Holding Co or connected person acquires/is to acquire substantial non-cash asset from the
Company/Holding Co. (CA06 s.190(1)(a) – company selling
 Co acquires/is to acquire substantial non-cash asset from such a dir/connected person (CA06 s.190(1)(b) –
company buying
o If Co. is a subsidiary and Dir of the subsidiary is also the Dir of the holding company, approval of the holding Cos.
members is required, or be conditional upon such approval (s.190(2)
• Exceptions
o No approval by members is required where:

 The Company is not a UK company (CA06 s.190(4)(a), OR

 The company is a WHOLLY owned subsidiary of another body corporate (CA06 s.190(4)(b)

• i.e. NewCo2 will not need approval of members, but NewCo1 may still need to get its members’
approval if it has a director who is also a director of NewCo2 (see s.190(2) above)
• Where consent is not obtained:
o Contract voidable
o Director who undertook is liable for losses and must account for any gains

1) Must be a transaction between a Company and one of its Directors, or a person connected with the Director
a) Connected persons:
i) Family (CA06 s.252(2)(a))
(1) Defined in s.253(2)(a) to include marriage etc
ii) A body corporate with which the director is connected (CA06 s.252(2)(b))
(1) Connected if he and the person connected with him to the body corporate are interested in at least 20% of nominal
share capital/exercise or control the exercise of more than 20% of voting power at any GM of that body (CA06
s.254(2)(a and b)
(a) BASIC EXAMPLE - if you have a 55% share in a holding company which has a 60% interest in the subsidiary,
you have an interest of 33% in that subsidiary which is more than 20%, therefore you are connected i.e. if you
control a Co. which controls another Co. (CA06 s.254(4))
2) Must be a Non-Cash Asset
a) NCA defined in CA06 s.1163:
i) Any property or interest in property, other than cash (s.1163(1))
ii) The creation or extinction of an estate or interest in, or a right over, any property (s.1163(2)(a))
iii) The discharge of a liability by any person, other than a liability for a liquidated sum (s.1163(2)(b))
3) The NCA must be of substantial value:
a) Substantial Value defined in CA06 s.191 as either:
i) Exceeding 10% of company’s asset value and is more than £5,000, OR
ii) Is more than £100,000
Payments to directors in connection with the transfer of undertaking (business acquisition)
• S.218 CA06
• If payment made to director in connection with transfer and by way of compensation for loss of office or as consideration for or in
connection with his retirement from office then the proposed payment (including amount) must be disclosed to members and
approved by OR
o If this is not done, director holds payment on trust for company and director responsible for making will have to
indemnify company for any resulting loss

• Does not apply to bona fide payments by way of damages for breach of contract or by way of pension in respect of past services –

Directors’ service contracts

• If appointed to Newco and given service contracts for more than 2 years, consent by OR required – s.188 CA06
o Memo of proposed contract made available at company office for at least 15 days prior to meeting and at meeting itself
o If written resolution used (private companies only) then memo must be supplied to each member before or at the time his
signature is required – s.188(5)
• If consent not acquired, contract terminable at any time on reasonable notice – s.189
Condtional Contracts
What they are
• Ideally exchange of contracts, signing and completion will happen simultaneously
• Sometimes there will be a gap and the acquisition agreement will be made conditional on the happening of certain events
o Parties sign the agreement and are bound to complete from this point on, assuming the conditions are fulfilled
o Between signing and eventual completion, parties will then be concerned with ensuring these conditions are met

Their effect
If a condition is not (but may still be, or may not be) achieved
1. Extend period for fulfillment of condition
2. Waive condition
3. Alter price
4. Walk away

If it proves impossible to achieve a condition

Include a provision for both parties to be able to walk away, free from any liability

Where a conditional contract is not possible

1. Just wait for consent
a. Parties not bound here as no signature so tie-in with a lock-out clase during interim to prevent seller simply selling to
someone else
2. Agree to simultaneous exchange and completion and just take a risk
3. Negotiate a new contract with the 3rd party (where applicable and where no confidentiality agreements)
4. Obtain warranties and indemnities
a. that condition will be fulfilled and if not, any costs will be indemnified

Causes of delay
1. Obtaining consents of landlord to assignment of leasehold premises
2. Entering into arrangements with 3rd parties re: fundamental contracts (novation, assignment or fresh agreements)
3. Removing charge from assets
4. Obtaining consent of charge-holder for asset to be transferred subject to the charge
5. Receiving confirmation from floating charge-holder that charger has not crystallised

Conditions precedent
What they are and provisions in the acquisition agreement
• Specified conditions that must be fulfilled – commits both parties to acquisition except where conditions not fulfilled
• Following provisions are usual to include:
1. obligation on one party to take all reasonable steps to try to procure satisfaction of condition as early as possible; AND/OR
2. Undertaking by both parties to cooperate in procurement of fulfilment of condition
3. long-stop date by which conditions must be satisfied (or waived by benefiting party) and, in default, provision for agreement
to terminate automatically without any liability attaching to either party
4. if conditions satisfied prior to long-stop date, provision for completion to take place within specified period of this happening

Typical conditions precedent

1. HMRC issuing clearance in relation to roll-over relief from capital tax on share for share exchange
2. OFT notifying buyer that doesn’t intend to refer acquisition to Competition Commission
3. Resolution of shareholders of buyer authorising directors to issue shares to seller in consideration for shares in the target
4. substantial customer confirming that won’t exercise contractual right to terminate agreement with target on change in control
of company

Who is responsible for each?

• Each condition should specify whose responsibility it is to procure the fulfilment of the condition

Seller’s undertakings pending completion (that buyer will demand)

Management of the business
• Buyer will insist on seller managing business in normal way and to ensure business buyer gets at completion has not materially
altered since exchange
• Buyer may demand to have some managerial control/say in how business run in interim period
• Examples:


1. obligation on one party to take all reasonable steps (or ‘best endeavours’, depending on who working for) to try to procure
satisfaction of condition as early as possible; AND/OR
a. Undertaking by both parties to cooperate in procurement of fulfilment of condition
2. long-stop date by which conditions must be satisfied (or waived by benefiting party) and, in default, provision for agreement
to terminate automatically without any liability attaching to either party
3. if conditions satisfied prior to long-stop date, provision for completion to take place within specified period of this happening
4. Seller to continue to run business in ordinary way
a. Seller will agree not to do any of the following without first obtaining buyer’s consent:
i. Enter into contracts or other commitments involving expenditure exceeding a specified amount
ii. Appoint any additional directors
iii. Lend or borrow money except in routine matters ordinary course of business
iv. Grant any mortgage, charge or debenture over assets
v. Settle any claim or dispute
vi. Acquire or agree to acquire any property, commit itself to capital expenditure or enter into any hire-
purchase or leasing agreements
vii. Enter into any agreement or dispose of all or part of its business or assets except in relation to routine
matters in the ordinary course of business
viii. Alter terms of employment of any employee or director
5. Buyer may demand to have some managerial control ie. Right to attend board meetings
6. Repetition of all warranties by seller at completion
a. seller may be allowed to disclose in interim period but buyer will retain right to remedy of this breaches previous
warranties (provides remedy whilst preventing acquisition falling through because of material breach)
7. Right to terminate
a. Material breach of warranty?
b. Material adverse change in the business?
c. Loss of specific contracts key to the business?
Pre-completion preparations by seller or its solicitor
Statutory books and filing requirements
• Ensure complete and up to date
• Register if members, directors and charges must be accurate
• Minutes properly written up
• Stock transfer forms duly stamped
• Share certificates available for all issued shares of target
• All filings at CH complied with:
o Accounts and annual returns filed
o Notices of increase ASC, share allotments and changes of director/secretary duly given
o Charges register doesn’t reveal any debenture which has been repaid (memo of satisfaction should have been
forwarded to Registry)

Title deeds
• Collect all those not subject to charge to pass to buyer on completion
• If charges to be released on completion, arrangements for charge-holder to pass over deeds on completion

Powers of attorney
• If individual seller cannot attend signing meeting, may appoint proxy to attend that and any other completion meetings
o Form appointing proxy to be deposited at registered office not less than 48 hours before meeting
• Must ensure completion board meeting is quorate
o Any director unable to attend should appoint proxy to attend and vote on behalf if articles allow (Table A 64-69

Pre-completion preparations by buyer or its solicitor

• Repeat those made earlier:
o Against target at CH
o Against subsidiaries of target
o Against corporate seller
o Bankruptcy searches against individual sellers
o Patent and trade-mark searches where appropriate
• May also make appointment with seller to inspect statutory books of target prior to completion

Corporate buyer
• Board meeting of buyer held prior to completion
o Approve and enter into Investment Agreement
o Approve terms of draft acquisition agreement
o Authorise signing of the agreement and completion of acquisition
o May appoint director committee to attend completion on behalf of company
o Certified copy of these minutes handed over to seller to prove authority to complete etc
o If consideration partly or wholly shares, may need to increase ASC and authorise dirs to issue
Completion (generally the below will happen simultaneously)

Completion Meeting
Where no delay between exchange and completion, following will happen at it:
1. Seller’s solicitor delivers
a. disclosure letter
2. Parties sign and exchange:
a. Investment Agreement (NewCo 1, PE house, Bank…);
b. Acquisition agreement and any tax indemnities (NewCo 2, Seller)
c. if signed by attorney, also deliver power of attorney
3. Each seller signs stock transfer form and delivers this will relevant share certificates
4. Completion board meeting of target is held
5. Directors’ service agreements are signed and exchanged
6. Outstanding loans by seller(s) to company or vice versa may be discharged
7. Seller’s solicitor delivers
a. statutory books
b. title deeds to properties (including any certificates of title given by seller’s solicitor)
c. documents of title relating to other assets
d. originals, counterparts or certified copies of licences to assign leasehold property, novation agreements and consents
from third parties to assignment of contracts
e. financial records and books of account, customer lists, computer programs, designs, drawings, plans, sales and
promotional materials, national insurance, PAYE and VAT records, employee records and other docs required to run
the business
i. seller reserves right for limited period after to take copies of these for their own records
f. agreements to which target is party
g. duly executed releases of charges over assets and confirmation of non-crystallisation of charges
h. insurance policies
i. certified copy of special resolution of selling company to resolve to change its name
j. where seller is company, board resolution authorising representative to sign the documentation
8. Buyer’s (NewCo2) solicitor delivers:
a. banker’s draft for cash consideration
b. share certificates for any consideration in shares
c. board resolution authorising representative to sign transaction documentation

NB - Where there is a delay, (1) and (2) will happen at exchange and the rest at completion

Business Sale
• Any land included must be transferred by deed (assignment, transfer or conveyance as appropriate)
• Assignment of certain IP rights as appropriate
• Goodwill and benefit of contracts may also be assigned
• Title to loose machinery etc simply passes on delivery

Completion board meeting of target

1. approve transfer of shares
2. appoint new director and a company secretary
3. accept resignations of directors and company secretary
4. approve and authorise signing of director’ service contracts
5. accept resignation of auditors of target and appoint new auditors
6. change registered office of the company
7. change accounting reference date of the company
8. alter existing bank mandates
9. call EGM
10. allow directors to make s.317 CA85/s.177 CA06 (from Oct ’08) declarations of interest

Completion EGM
• Buyer of shares doesn’t become member of target until name entered on register of members – s.22 CA85/s.112 CA06 from Oct 08)
• Registration cannot take place until stock transfer form properly stamped so buyer will not be able to exercise voting rights
on completion of acquisition
i. Parties normally agree that selling shareholder will pass any resolutions necessary for buyer on completion
1. buyer’s solicitor will forward draft minutes to seller in anticipation of the meeting


1. give consent to any SPTs – s.190 CA06
2. consent to term in director’s service contract where employment may continue for more than 2 years – s.188 CA06
3. alter articles of company where necessary

• Buyer should arrange for insurance on assets beginning on:
• Date of completion; OR
• If contract conditional, on satisfaction of conditions

Buyer’s solicitor
Filing at CH
1. Form 287 – s.87 CA06
a. change of registered office
b. changes of directors and secretary
c. change of accounting reference period
2. Copy of letter of resignation of auditors within 14 days – s.517 CA06
3. Copies of any SRs of the company
4. print of new articles

5. Where issued shares as consideration:

a. Form 123 (increase ASC)
b. Copy of OR granting directors authority to allot – s.80 CA06
c. Copy of SR suspending any pre-emption rights – s.89 CA85
d. Return of allotments
i. Currently Form 88(2)
ii. S.555 CA06 from Oct 08
Statutory books
• Complete them, including:
a. Registers of
i. members (after stock transfer forms stamped)
ii. directors
iii. secretary
iv. minutes

Matters outstanding at completion

• Buyer may need to release seller from any guarantees in relation to obligations of the target
• Buyer will often undertake to do this in the acquisition agreement and indemnify in meantime

Both parties
• Copies of complete set of documents used in acquisition
• Used as source of reference if any problems crop up (such as warranty issues)

LEGISLATION: Income and Corporation Taxes Act 1988

STEP 3: Calculate ‘TOTAL PROFIT’
STEP 4: Calculate the TAX


A company’s income profits chargeable to corporation tax will be calculated under the rules of the appropriate Schedules to ICTA
1988, most notably Schedule D, Case I, being applicable to profits from the carrying on of a trade.

It will be necessary to calculate the trading profits for an accounting period:


CHARGEABLE RECEIPTS: money received from the sale of goods/services etc.

LESS DEDUCTABLE EXPENDITURE: Particular examples of deductible expenditure for a company are:
• Directors’/employees’ salaries or fees and benefits in kind.
If the salary is paid for personal reasons and not wholly and exclusively for the purposes of the trade, then it will not be
 Copeman v William J Flood and Sons Ltd – a substantial salary paid to a director who performed minimal duties
should be apportioned into two parts; that part which was reasonable for the duties performed would be deductible in
calculating the company’s taxable profits and the other excessive part would not.
• Contributions to an approved pension scheme for directors/employees or health insurance These are fully deductible.
• Payment to a director/employee on termination of employment. Where a payment is made to a director/employee by way of
compensation for loss of office or employment, this will qualify as a deductible expense under the normal rules.
Where a payment is made in return for a director’s/employee’s undertaking not to compete with the company’s business
following termination of his office or employment, such a payment is deductible under specific provisions (s 225 Income Tax
(Earnings and Pensions) Act 2003).
• Interest payments on borrowings. These will generally be deductible under the loan relationships rules.
Normally 25% of value of pool
Enhanced First Year Allowance for newly acquired goods for SMEs

o (50%) Small Enterprise – must satisfy at least two of the following criteria:
 annual turnover of not more than £5.6 million
 assets of not more than £2.5 million
 not more than 50 employees
o (40%) Medium-sized Enterprise – must satisfy at least two of the following criteria:
 annual turnover of not more than £22.8 million
 assets of not more than £11.4 million
 not more than 250 employees


A company’s gains chargeable to corporation tax will be calculated using the same broad principles as for capital gains tax, but with
important modifications. Any gain remaining after the application of reliefs forms part of the company’s total profits for the purposes
of corporation tax (s8 Taxation of Chargeable Gains Act 1992). To calculate the gain within STEP 2:

Stage 1: identify a chargeable disposal

A disposal (sale or gift) of a chargeable asset by a company.
 “Chargeable assets” for CT purposes are defined broadly as for CGT (although not goodwill or IP); most common examples
are likely to include land and buildings and shares held in other companies (but note there may be an exemption if disposing
of a substantial shareholding).
Capital allowances may be available in relation to the expenditure incurred on plant and machinery. If this is the case, it not
benefit from the usual capital gains exemption for ‘wasting assets’ (assets with a predicted working life of 50 years or less).
Unlikely to arise in practice.

Stage 2: Calculate the gain (or loss)


(e.g. legal fees/agent fees)

(e.g. legal fees/agent fees)
(any expense incurred ‘wholly and exclusively in enhancing asset’s value (s38))
GAIN (before indexation) or LOSS

GAIN (before indexation)

INDEXATION ALLOWANCE(S) No indexation on disposal costs
(acquisition value x ind.%)
(subsequent expenditure x ind.%)
GAIN (after indexation)

a. For a company the indexation allowance will be given for the period between the date of the acquisition of the asset (or 31
March 1982 if later) and the date of disposal  No Restrictions
b. The indexation allowance can reduce the gain to zero, but cannot create or increase a loss.
c. If the disposal of a chargeable asset leads to a loss (ignoring indexation) that capital loss can be deducted from other
chargeable gains made by the company in its accounting period, but not from income profits. Any unused loss can be carried
forward to be deducted from the first available chargeable gains made by the company in subsequent accounting period(s)
(until the loss is absorbed).
d. If a company sells an asset at undervalue, a decision must be made as to what figure to use for the proceeds of disposal. If the
sale is merely a bad bargain then actual sale price will be used, but if there is a gift element then the market value of the
asset will be used.
e. If the company sells to a ‘connected person’, the sale will be deemed to take place at market value. A company is
 with a person if that person controls the company (alone or with others connected to him).
 to another company if they are both controlled by the same person or by a combination of that person and others
connected with him (s 286(5) TCGA 1992).

Stage 3: Apply reliefs

LEGISLATION: Taxation of Chargeable Gains Act 1992

‘Wasting assets’ which have a life of under 50 years (ss44-45)
Tangible moveables if the consideration is less than £6,000 (s 262)
Substantial shareholdings (Sch 7AC - inserted by FA 2002)
• A trading company disposes of a substantial (10% or more) shareholding in a trading company or a holding company of a
trading group, and
• The investing company has held 10% or more of the ordinary shares in the company invested in for at least 12 months in
the 2 years before the disposal

Roll-over relief on the replacement of ‘qualifying assets’(ss 152-157)
‘Qualifying assets’: a) goodwill and b) land and c) fixed plant and machinery (ss155-156)
• A replacement is acquired either within 1 year prior to the disposal or within 3 years after the disposal
• The replacement asset does not have to be of the same kind as the asset disposed of

NOTE: Relief is restricted if the asset is not used in the seller’s trade throughout the period of ownership or if the whole
proceeds are not reinvested in a new qualifying asset.
Roll-over relief on paper for paper transactions (ss127-137A)

Corporate venture scheme (Sch 15 FA 2000)

• Investment Relief: deduction from the investing company’s corporation tax bill up to 20% of the amount invested in shares
in the issuing company;
• Deferral Relief: if the shares acquired in the issuing company realise a capital gain when they are disposed of, that gain
can be deferred if the investing company reinvests in more qualifying shares;
• Loss Relief: if the shares acquired in the issuing company realise a capital loss when they are disposed of, that loss can be
set against the investing company’s other capital gains (in the normal way) or (as an exception to the normal rules) against
its income profits.

Stage 4: Aggregate remaining gains/losses


Receipts from transactions in intangible fixed assets will generally be treated as income receipts and expenditure on intangible fixed
assets will generally be deductable in calculating a company’s income profits (although not when the expenditure is part of the
incorporation of a business).

Any profit on the disposal of intangible fixed assets may be rolled-over into the acquisition of replacement intangible fixed assets
(provided the qualifying conditions are met) thus deferring any corporation tax charge arising from the disposal. Otherwise profits and
losses on disposal will generally be accounted for in the income profit/loss calculation.

The treatment of intellectual property and goodwill for tax purposes will, in general, reflect the UK Generally Accepted Accounting
Practice (GAAP) or International Accounting Standards (IAS) and so reference will need to be made to a company’s accounts to
establish the exact effect of that treatment on a company’s profit or loss for the accounting period in question.
Total profits = income profit + capital profit


The following charges on income are deductable (ss338-338B):
a. Qualifying charitable donations (e.g. those falling within s339), and
b. Amounts allowed in respect of gifts of shares, etc to charities.


The rates are fixed for a financial year (1 April to 31 March): if the rate changes during the company’s accounting period, the taxable
profit is apportioned across the applicable tax rates.

Tax on profits over £1,500,000 (If exceeds 1.5m then all is taxed at 30% - no 30%
division) the ‘mainstream corporation tax’
Tax on profits between £300,000 and £1,500,000 32.5%
relief is given at this marginal rate
Tax on profits not exceeding £300,000 20%
the ‘small companies rate’
NOTE: Franked investment income is ignored when paying tax, but it is included when calculating the rate of tax applicable.

Dividends paid by a company are not deductible in calculating the company’s taxable profit, but are treated as distributions of profit.
Similarly, when a company buys back its own shares from shareholders, the payment is not deductible in calculating the company’s
taxable profit and that part of the price which is over and above the allotment price may be treated in the same way as a dividend.
Neither of these payments reduces the company’s profits chargeable to CT.


NOTIFICATION: Section 55 of the Finance Act 2004 requires a company to inform HMRC in writing of the beginning of its first
accounting period (such notification to be within three months of the start of that period). Thereafter, a notice requiring delivery of a
self-assessment corporation tax return will be issued.

PAYMENT: For most companies, the corporation tax due under self-assessment is payable within nine months and one day from the
end of the relevant accounting period (TMA 1970, s 59D). The company must make a payment to HMRC within this time limit in
relation to its anticipated corporation tax liability for that period, even though the final assessment may not have been agreed with
HMRC by that stage (the deadline for the self-assessment return itself is 12 months after the end of the relevant accounting period).

Large companies may, depending on the company’s overall corporation tax liability, have to pay the tax in four instalments (TMA
1970, s 59E). A ‘large’ company for these purposes is one with annual profits of £1,500,000 or over. The instalment due dates are
calculated by HMRC as:

First 6 months and 13 days after the start of the accounting period
Second 3 months from the first instalment due date
Third 3 months from the second instalment due date
Fourth 3 months and 14 days after the end of the accounting period

Large Co plc is r equired to p ay c orporation t ax by instalments for its accounting period ending 31 December 2007. These
instalments will be due on 14 July 2007, 14 October 2007, 14 January 2008 and 14 April 2008.

Under the systems for large and other companies, payments are likely to be made based on an estimate of the company’s final liability.
Any adjustments necessary are made once the final liability is known.