Structure and process, legal regulation and consentsStructure
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
Typically, a contract, referred to as a sale and purchase agreement, is executed between the relevant parties to acquire or dispose of privately owned companies, businesses or assets. Privately owned companies can also be acquired by ‘contractual offer’ followed by a minority squeeze-out, provided that the offer is made in accordance with Part 28 of the UK Companies Act 2006 (CA 2006), or by a ‘scheme of arrangement’ proposed by the company to be acquired in accordance with Part 26 of the CA 2006.
The process of acquiring a company, business or assets will often turn on the complexity of issues and the number of parties involved, as well as whether the transaction involves a bilateral negotiation or a controlled auction process with multiple potential buyers.
An auction process in which interest from several buyers is solicited will typically involve:
- drafting an information memorandum as the basis of marketing the company, business or assets, completion of vendor due diligence and drafting of a sale and purchase agreement and other sale documents (approximately six to eight weeks);
- ‘round one’ expressions of interest from potential buyers who will then be permitted to undertake due diligence (approximately four weeks);
- ‘round two’ offers by potential buyers with mark-ups of the transaction documentation (approximately four weeks); and
- negotiation of transaction documentation with one or more buyers until definitive terms are agreed with one party (up to two weeks).
The larger and more international the target company, business or assets, the longer each phase of a process can take. Up to three months will often elapse between the distribution of an information memorandum and the execution of definitive transaction documents. A bilateral transaction can take longer to complete owing to the lack of competitive tension in the process.Legal regulation
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
The CA 2006 sets out the regulatory framework for English limited liability companies. There are a range of statutes and regulations dealing with the transfer of employees, title to property, data protection, pensions and competition that are relevant to private acquisitions and disposals.
Although most sales of English companies will be governed by English law, it is possible for acquisitions to be governed by the law of an overseas jurisdiction. However, legal formalities applicable to the transfer of shares and assets and liabilities that are subject to local law will have to be complied with.Legal title
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
Under the Law of Property (Miscellaneous Provisions) Act 1994, shares of an English company or assets located in England and Wales can be acquired with ‘full title guarantee’ or ‘limited title guarantee’ (referred to as title covenants). Subject to certain additional covenants that apply in respect of real property, a sale with full title guarantee means:
- the seller has the right to sell the property;
- the seller will (at its own cost) make reasonable efforts to give the buyer the property that is promised; and
- the property is free from charges, encumbrances and third-party rights expect those that the seller does not and could not reasonably be expected to know.
Limited title guarantee is the same except that the property is considered to be free from encumbrances from the time of the last sale for value.
Title covenants will not be implied if transaction documentation makes no reference to them. However, a buyer may be unwilling to accept the reasonableness and knowledge qualifications included in implied title covenants and prefer to negotiate unqualified title to shares or assets.
Title to shares in a company incorporated under the CA 2006 transfers upon the company’s register of members being updated to reflect the buyer as the registered holder of the shares following receipt by the company of an instrument of transfer duly executed by the seller (and the buyer, if the nominal value of each share has not been paid in full). The transfer of title to assets subject to English law may require notifications to be given, consents from third parties to be obtained and registrations to be made.
Legal and beneficial title are distinct interests in property. A person registered as holding the legal title to a share in a company incorporated under the CA 2006 may be a nominee with a different party having the right to receive the economic benefits of the share. Accordingly, the beneficial interest can be transferred without having to update the register of members of the company. Interests in other assets, such as real estate, can be held in the same way.Multiple sellers
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
Typically a buyer will prefer all sellers to sign the transaction documentation and agree to be bound by the same.
Minority shareholders may, however, be required to sell their shares pursuant to ‘drag-along’ provisions contained in a company’s articles of association or in a shareholders’ agreement requiring the transfer of title to their shares if specified conditions are satisfied.
Further, if a private acquisition is structured as a contractual offer under the CA 2006, the buyer can compulsorily acquire minority shareholders who have not accepted the offer once the buyer has acquired at least 90 per cent in value and 90 per cent of the voting rights carried by the shares to which the offer relates. If structured as a scheme of arrangement, a scheme binds all minority shareholders provided a majority in number representing 75 per cent in value of those shareholders attending and voting approve an arrangement that is sanctioned by the English Companies Court.Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
As a matter of English contract law, a buyer can generally choose which assets or liabilities it wishes to acquire in a transaction that is structured as a business or asset sale.
However, a buyer cannot structure a transaction as a business or asset sale with a view to avoiding responsibilities to employees engaged in the target business. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (as amended) (TUPE) apply to the acquisition of a business in the UK, and require that contracts of employment are automatically transferred to the buyer of a business and that employee benefits must be honoured. There are very few exceptions to TUPE, and attempts to exclude its application will be void.
A transfer of assets or liabilities may require customary third-party consents: for example, a landlord’s consent to the assignment of a lease or a counterparty’s consent to the assignment or novation of a contract.Consents
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
Selling shareholders may be subject to ‘pre-emptive’ and ‘tag-along’ rights. Pre-emptive rights require a shareholder to offer their shares for sale to other shareholders before they can be sold to a third party. Such rights may take the form of a right of first offer, whereby the selling shareholder must negotiate a sale with the other shareholders before approaching third parties, or a right of first refusal, whereby the selling shareholder must give the other shareholders the right to match the terms of a sale that has been negotiated with a third party. Tag-along rights restrict the ability of a selling shareholder to transfer his or her shares in a transaction that excludes other shareholders.
Acquisitions of companies and businesses in the UK are subject to the merger control regime set out in the UK Enterprise Act 2002, pursuant to which the UK Competition and Markets Authority (CMA) may investigate transactions that satisfy certain jurisdictional thresholds, either upon receipt of a notification from the parties or on its own initiative. The UK Enterprise Act 2002 provides two jurisdictional thresholds:
- a ‘share of supply’ test, which is satisfied when a transaction creates or enhances a 25 per cent share of supply or purchases of any goods or services in the UK (or in a substantial part of it) (this is not a market share test, and the CMA has a wide discretion in describing the relevant goods or services); and
- a ‘turnover test’, which is satisfied when the enterprise over which control is acquired has generated turnover in the UK in the preceding fiscal year exceeding £70 million.
Since 11 June 2018, lower thresholds have applied to transactions in the military and dual-use goods, computing hardware and quantum technology sectors, where the ‘turnover test’ threshold is £1 million and the ‘share of supply’ test is satisfied even if the acquirer has no share (provided the target has an existing share of supply of 25 per cent or more). The UK government has also laid plans to expand the scope of the lower threshold to transactions in the following sectors: artificial intelligence, cryptographic authentication technology and advanced materials.
Notification of a transaction to the CMA is voluntary. However, in practice, a large number of transactions are notified to give parties legal certainty, as the CMA may commence an investigation on its own initiative and subsequently refer a transaction to a ‘Phase 2’ review.
The CMA has a duty to refer transactions for a Phase 2 review where it believes there is, or may be, a relevant merger situation that has resulted in or may be expected to result in a substantial lessening of competition in the UK. If a transaction is subject to a Phase 2 review, without the CMA’s consent, parties to a completed merger are prohibited from undertaking further integration, and parties to an anticipated merger are prohibited from acquiring an interest in shares in each other. The CMA also has power to accept undertakings or make orders preventing parties from taking an action that might prejudice the outcome of a Phase 2 reference.
Note that up until the end of the Brexit transition period (currently planned to end on 31 December 2020), the European Commission will continue to have exclusive jurisdiction over transactions that fall within the scope of the European Union Merger Regulation (including with respect to any effects on the UK market). As such, these transactions will not (with limited exceptions) be subject to scrutiny by the CMA under the Enterprise Act 2002 provided that they are formally notified to the EC prior to the end of the transition period. The future relationship between the EU and UK merger control regimes after the transition period remains subject to negotiation but it is expected that transactions meeting both the EU and UK merger control thresholds will run the risk of being reviewed by the European Commission and the CMA in parallel.
The UK does not subject the acquisition of companies, businesses or assets to general national industry considerations, although the Secretary of State has the power:
- under the UK Enterprise Act 2002 to intervene in transactions giving rise to public interest concerns relating to national security, media quality, plurality and standards and financial stability; and
- under the Industry Act 1975 to prohibit the acquisition by an overseas person of an important manufacturing undertaking if it would be contrary to the interests of the UK (although, to date, this power has not been exercised).
Are any other third-party consents commonly required?
The need to obtain a third-party consent will turn on the law governing the transfer of the relevant assets and liabilities. With respect to assets and liabilities governed by English law to be transferred in connection with the acquisition of a business, the agreement of the counterparties to contractual arrangements will be required to transfer obligations of the seller to the buyer and the assignment of the benefits of contractual arrangements may be subject to counterparty consent.
The consent of landlords to transfer English leasehold property and the consent or waiver of rights of lenders to transfer English law-governed loans is ordinarily required in connection with the acquisition of a company, business or assets. Where security has been granted pursuant to English law over the assets of a company or business, releases and non-crystallisation certificates will normally be required.
Where certain assets to be transferred are required to be registered under English law, the transfer of ownership will be completed only once the relevant register is updated.Regulatory filings
Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?
Where shares in an English company are to be transferred, the new holder of the shares will not be entered in the register of members of the company until all stamp duty has been paid.
Where certain assets to be transferred are required to be registered under English law, registration may not be completed by the relevant authority until the relevant registration or filing fees have been paid. These fees are generally of a nominal amount.
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17 July 2020.