Liverpool Law Mar 2017

Management Feature
Strictly Boardroom
WHAT DO CORPORATE LAWYERS DO WHEN SELLING A
COMPANY?
This is the first of a series of articles taking you ‘behind the scenes’ of
common corporate transactions and illustrating some of the techniques
that corporate lawyers employ to get the best deal for their clients. What
follows will be reassuringly familiar to those experienced in transactional
work and hopefully assist those less experienced to take on the challenge
with greater confidence.
In this article, we look at a company sale where the corporate lawyers are
acting for the selling shareholders. A subsequent article will look at how
lawyers approach things differently when acting for the buyer.
Let’s assume that you have received an indicative offer from a reputable
company that wants to buy the entire issued share capital of your private
limited company. You have taken some accountancy advice on the offer price
and been advised that it is at or above market value. You and your coshareholders
consider this is the right time to sell and are keen to proceed.
Let’s also assume that you have been recommended to a law firm that
specialises in company transactions. They have given you a fee budget for the
transaction and, quite reasonably, you want them to explain exactly what
they will be doing for their fee and what benefit you will get from instructing
them.
You’ll know if you’re in good hands if the lawyer leading their team puts the
kettle on and makes some tea. This is not perhaps the most technical thing
corporate lawyers do but there are few better ways to start a relationship. The
explanation of what is involved should go something like this.
Understanding the deal drivers - Corporate lawyers are often criticised for not
spending enough time listening to their clients to properly understand why
the transaction is taking place and what the key objectives are. The process of
selling a company ‘belongs’ to the sellers and not their advisers and so the
tactics and timetable should be worked up collaboratively.
Engagement letters - The engagement letters of all professional advisers
(including lawyers, accountants, corporate finance advisers and other due
diligence providers) are legal contracts and should, ideally, be considered
with the benefit of legal advice. Typically, this advice will cover the scope of
the professional’s work, the fees they propose to charge, how and when the
fees are to be paid and the wording of any proposed limits on liability. As it
is the shareholders of the company, rather than the company itself, that will
be the contracting party, other issues include the recoverability of VAT and
what fees, if any, are due if the transaction does not complete.
Confidentiality agreements - Before entering into any meaningful discussions
with a potential buyer it is essential that a properly drafted confidentiality
agreement (a non-disclosure agreement or NDA) is put in place to protect the
company’s confidential business data including information about finances,
customers, employees and know-how. Corporate lawyers will advise on issues
such as who the contracting parties should be, how to define the nature of
the transaction, how long the agreement should last and, importantly, the
contractual remedies available in the event that the proposed buyer breaches
the terms of the agreement.
Heads of terms - Converting an indicative offer into formal heads of terms is
a key step in any transaction as it establishes the ground rules between the
parties, gets some agreement on key deal points and flushes out any potential
stumbling blocks at an early stage. The process aims to minimise the risk of
everyone wasting further time and money. Heads of terms can be drafted by
the sellers themselves with input from their financial and legal advisers or
drafted by the advisers for the sellers to approve. Important legal issues are
around the overall legal structure of the deal, which matters the deal is
conditional upon, who the contracting parties should be, which elements of
the heads of terms are binding and non-binding, confidentiality and
exclusivity. Buyers tend to push for some form of exclusivity period to reduce
the risk of them investing money in instructing advisers and conducting due
diligence only to have the deal pulled from under them. Not all sellers agree
to this and those that do should take great care not to lock themselves into
one specific buyer on onerous terms.
Enquiry memorandum - Prior to preparing the first draft of the sale and
purchase agreement based on the agreed heads of terms, the buyer’s lawyers
will very likely send through to the sellers or their lawyers a long list of
questions about the business. The aim of this ‘enquiry memorandum’ is to
help the buyer better understand the detail of the business and to formulate a
due diligence plan. Many of the questions create traps for the unwary as the
buyer will no doubt seek to rely on the answers given during or after the
transaction. The job of the sellers’ lawyers is to ensure that answers are given
in the correct way. There is an element of protocol to this based on
established commercial practice and, correctly done, the answers should offer
the selling shareholders a high level of protection from future claims for
breach of warranty, non-disclosure or misrepresentation.
Dealroom - To avoid exchanging large volumes of documentation and data
by email or in paper format, it is now common to set up an online dealroom
where everything is stored in a secure password-protected environment
accessible only by the professional advisers. The dealroom provides a single
repository for all information that a seller wishes to provide to a buyer. The
sellers’ lawyers usually set up the dealroom, advise on how information
should be presented and then manage the access to it.
Due diligence - Due diligence is the process by which the buyer attempts to
verify that the asset being bought is worth what the buyer has offered. As
well as reviewing the sellers’ responses to the enquiry memorandum and the
contents of the dealroom, the buyer and the buyer’s professional advisers
may want to conduct other investigations into the company. These
investigations might include interviewing selected staff and customers (once
it is clear the deal will happen), auditing IT systems and financial data and
reviewing legal contracts and intellectual property rights. The role of the
sellers’ lawyers is to advise on issues of confidentiality and assist the sellers in
responding to any issues arising from the buyer’s due diligence process in the
right way.
-
12 www.liverpoollawsociety.org.uk