The two principal methods used to acquire privately owned companies, businesses and asset structures are share purchases and asset purchases.

A share purchase is where the capital of the target company is acquired by the buyer. All assets and liabilities of the target remain in that entity and are all acquired by the buyer after the transaction has been completed.

An asset purchase on the other hand differs in that it involves purchasing some or all of the assets of the target business. Here the buyer will only assume responsibility for the assets that they specifically agree to take on and such liabilities (if any).

The initial preparatory stage of an acquisition transaction for either one of the methods listed above will usually begin with both parties entering into:

Letters of intent or Non-binding heads of agreement – this will summarise the key commercial terms of the deal; outline the timetable and obligations of the parties during the negotiations. The letter of intent provides a useful road map of the process that lies ahead. It can also serve as a tool to eradicate any conflicting views that the parties may hold at an early stage. However, the letter of intent is a preliminary document and cannot address every aspect of the agreement between the parties.

Confidentiality agreement – A buyer will typically sign this before gaining access to information about the target company. This agreement will prohibit parties to the agreement from disclosing certain information in the course of the transaction.

Exclusivity agreements – A prospective buyer may wish to seek protection on the time and money they have invested in pursuing an acquisition from rival buyers by signing an exclusivity agreement.

The parties will then appoint various advisors (such as lawyers and accountants), to help facilitate the negotiations and agreements.

Once the various initial agreements have been signed the due diligence process can begin. Here the buyer’s lawyers and accountants will submit a due diligence questionnaire to the seller and their advisors to complete. The length of this process will vary from deal to deal and will depend on many factors including the size of the privately-owned company and the number of assets it holds. A buyer will want to gather as much information as possible to get a clear idea of what they are taking on. This information will be vital as it will ultimately determine whether they wish to go ahead with the acquisition. The buyer will need to be fully informed on the business’s strengths and weaknesses, accounts, liabilities and risk areas which may cause an impact on deal-structuring or contractual protection and identify any third-party consents or approvals which may be required. The onus is on the buyer and their advisors to find out everything it needs to about the company. This is because there is no legal obligation on the seller to disclose information unless specifically requested by the buyer.

If the buyer still wants to proceed with the purchase, then they need to formalise this by virtue of either a Share Purchase Agreement (SPA) or an Assets Purchase Agreement (APA).

Both contracts will map out the agreement, sale price and all the terms and conditions. It is usually the buyer, along with their legal advisors who produce this agreement since they are the party that takes on the most risk in the acquisition and therefore need greater protection.

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Legal regulation

The Companies Act 2006 sets out the regulatory framework for limited liability companies in the UK. These companies will often be subject to various regulations from statutes when dealing with issues such as the transfer of employees, title to property and data protection.

As most companies and businesses have employees, the Transfer of Undertakings (Protection of Employment) Regulation (TUPE) is commonly raised during acquisition. With the asset purchase method, the buyer will automatically acquire the employees involved in the business. The exception to the application of TUPE is limited and any attempt to exclude will usually be void.

TUPE will automatically transfer to the buyer most existing employment liabilities relating to the transferring employees. It is not possible to contract out of such automatic transfer provisions, although it is very common for the buyer to seek indemnities from the seller for such pre-transfer liabilities which (financially at least) will effectively reverse the effect of TUPE in this respect.

TUPE does not apply with share purchases as they do not involve a change in employer therefore, there is no statutory obligation to consult employees.

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Legal title

The Law of Property (Miscellaneous Provisions) Act 1994, states that shares of an English company or assets located in England and Wales can be acquired with either a full title guarantee or a limited title guarantee.

Looking at each one, in turn, a full title guarantee assures the seller that they have the right to sell the property. The sale of such is free from all charges and encumbrances and all rights exercisable by third parties except any charges or encumbrances that the seller could not reasonably be expected to know about.

Limited title guarantee is similar in that the disposing party has the right to dispose of the property and has to do all it reasonably can to give the title it purports to at its own cost however, it is accepted that the property is free from any charges and encumbrances from the time of the last sale value.

Under the Companies Act 2006, titles to shares in a company do not transfer automatically, the buyer has to be registered in the company’s register of members as the owner of the shares. A duly executed stamped stock transfer form has to be completed and submitted to the company by the seller. The board of directors in the company will then have to give their approval on the registration of the stock transfer form. The board of directors can choose to reject the transfer but if they do so, they have to provide notice to this effect together with the reasons for their refusal.  

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Exclusion of assets or liabilities

It is well established under contract law that a buyer has the right to choose which assets and liabilities it wishes to acquire during the acquisition of an assets purchase sale. However, a buyer cannot purely for the purposes of avoiding responsibility on assets and liabilities they do not want, structure a transaction as an asset sale.  

It is important to note that a transfer of assets and liabilities may be subject to third-party contractual consent. For example, if the target business property includes a leasehold premise then the landlord’s consent may be required for the assignment of a lease.

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Consents

A buyer will need to establish whether or not the assets that they have acquired require consent or the involvement of any regulatory authorities. There are several regulatory authorities that a buyer may need to seek approval from, for example, if the target business operates in a regulated sector such as the financial service, utilities or telecommunications then it will be necessary to obtain consent for the change of ownership.

The sale of shares may be subject to ‘pre-emptive’ and ‘tag-along’ rights. Pre-emptive rights are based on the principle that a shareholder should be allowed to protect their shares from dilution. Share dilution occurs when a company issues new shares, this has the effect of reducing the shareholder’s ownership proportion. In order to prevent this, pre-emptive rights will give shareholders the right of first offer. This is where the seller is obligated to negotiate a sale with the other shareholders before offering it to third parties.

Comparably, tag-along rights prevent a shareholder from excluding other shareholders in a transaction where they are transferring their shares.

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Summary

The acquisition process can be extremely extensive and subject to many different statutes, regulatory authorities and controls. It is important to have an in-depth understanding of the prospective company and to make a fully informed decision whether not it is worth acquiring or not. In addition to this, you should be clear on what you are willing to take on from the business but also open to negotiation with the other side. Acquisitions and merges carry a lot of financial risks and therefore should be executed carefully.