With the stabilisation, and potential decline, of interest rates, expectations towards greater political stability, and changes to Business Asset Disposal Relief, we are seeing increased confidence in the M&A market.

This guide aims to walk through the key legal stages of private M&A deals in the UK – with a focus on structuring, due diligence, and execution of the transaction.

Deal Structuring – “Start with the endgame in mind”

M&A deal structuring serves as a master plan for the transaction, outlining how the target assets and liabilities will be transferred. A carefully calibrated deal structure, at a very minimum, aims to decrease risks, enhance value, and ensure regulatory compliance. While inadequate planning may lead to unexpected tax liabilities, a meticulous approach to deal structuring can yield significant savings in both taxes and legal costs.

Deal structuring can be viewed as a balancing act, requiring intricate alignment of both legal and financial elements. It also involves levelling the specific objectives of both sellers and buyers. The legal framework ensures regulatory compliance and safeguards stakeholder interests, while the financial structure focuses on optimising economic outcomes, enhancing tax efficiency, and securing appropriate funding.

When it comes to structuring a business acquisition, the key question is whether to purchase shares in the target company from the existing shareholders or to acquire specific assets directly from the target company. Share purchases tend to be more common, largely due to tax advantages and to the fact that asset acquisitions often require third-party consents, which complicates the process.

The form of consideration is another key factor influencing the overall deal structure. Buyers may offer consideration in the form of cash, loan notes and shares or, more often, a combination of the above. Some of the consideration may be paid at completion, and some may be deferred, potentially based on reaching certain financial targets in the years after completion. Each form of consideration form has its specific legal and financial characteristics and implications, and it is important to understand these from the outset.

Whilst heads of terms or a letter of intent will set out the headline terms of a deal and its structure, it is important to remember that due diligence findings (e.g., revealed management, assets, tax and financial issues) can impact the position of both buyer and seller and could influence changes to the final structure of the deal as it progresses.

Due Diligence – “To investigate a problem is, indeed, to solve it”

Once a  target has been identified and the initial offer price has been agreed, a heads of terms or a letter of intent will be signed to set out the indicative terms of the transaction agreed during earlier negotiations.

Although not legally binding (with an exception for exclusivity and certain other specific provisions), heads of terms play an important role in putting on paper the main terms of the transaction agreed in principle by the parties. It also outlines the potential structure of the deal and timetable for the due diligence process, contract negotiations, and completion.

It is when the heads of terms are signed that the buyer will be able to unleash its team of advisers to investigate the target’s business. This will include a scrupulous analysis of the target company’s financial, legal, operational, tax, and commercial information.

Identifying key issues within the target business is a pivotal moment during the transaction process as it has implications on the price, structure and, ultimately, whether the deal is going to happen.

In terms of the process, the buyer’s team would put together financial, legal, and tax questionnaires for which the seller’s team prepares responses and documents. Nowadays, the information and documents are mainly being shared by the sellers through a virtual data room.

The initial questionnaire is usually followed by supplemental questionnaires to deal with additional questions that arise on the buyer’s review of the initial replies and/or other issues that come up through the process.

Some of the big risk items, which are being investigated during the legal review would include:

• Title to shares
• Change of control provisions in customer contracts, as well as banking and financing documents
• Unstamped and/or missing stock transfer forms
• Potential and existing claims against the target, including employee claims
• Charges and security over the target or its shares
• Property rights, including lease terms and break rights
• IP assignment/claims/licenses/ownership

It is not uncommon for issues to emerge during due diligence that require remedial legal work prior to completion. For instance, this may involve updating or implementing a contract, an employee issue may need to be dealt with, or there may be incorrect filings at Companies House. Such issues, once identified, can be addressed in a number of ways, including putting in place rectification documents before completion, including a specific indemnity or warranty in the acquisition agreement, or potentially a price chip if the issue is serious enough.

Once the due diligence results confirm that the target company doesn’t have particularly scary skeletons in the closet that cannot be dealt with,  the parties will proceed to negotiating the main acquisition agreement. In reality, it is often the case that the parties negotiate the acquisition agreement in parallel with the due diligence process.

Acquisition Agreement and Other Key Documents

The acquisition agreement, which normally takes the form of either a share purchase agreement or an asset purchase agreement, serves as the primary contract through which the sale is realised.

While share and asset sales generally follow a similar structure, each has its own structure and specific provisions.

The acquisition agreement typically sets out, among other things:

• the subject matter (what is being sold) and all the parties to the transaction
• any conditions subject to which the sale has been agreed
• the consideration and the payment structure with various mechanisms for adjusting it
• the timetable
• the apportionment of risks between the parties (by way of warranties, indemnities, liability caps for breaches, set-off provisions)
• the restrictive covenants and confidentiality undertakings

It also addresses any outstanding matters identified during due diligence that have not been otherwise resolved.

On top of the agreement, other legal or regulatory provisions may also apply depending on the nature of the buyer/seller/target and the type of acquisition (e.g., Financial Services and Markets Act 2000, City Code on Takeovers, Listing Rules, AIM Rules, TUPE (Transfer of Undertaking (Protection of Employment) Regulations 2006).

Disclosure Letter

The disclosure letter, although closely connected to the acquisition agreement, is a separate document prepared by the seller. Its function is to highlight any areas where the warranties given by the seller in the acquisition agreement are not true, and to provide supporting explanations and documentation. By disclosing accurate information in sufficient detail, the seller protects themselves from future claims for breach of warranty, as where a matter has been properly and sufficiently disclosed, the buyer generally cannot later bring a claim in respect of it.

The disclosure process also benefits the buyer, as it creates greater transparency about the business being acquired by acting as an additional information gathering exercise. It helps ensure that the buyer is properly informed before committing to the purchase and reduces the risk of unpleasant surprises after completion.

Typically, a disclosure letter includes both general (or deemed) disclosures and specific disclosures. General disclosures refer to information that is publicly available or has been provided to the buyer during due diligence (e.g., the target’s accounts, information available at Companies House or Land Registry), and therefore is considered to have been disclosed to them automatically.

Specific disclosures, on the other hand, are detailed matters explicitly described within the disclosure letter itself, and sometimes in an accompanying bundle of documents. These specific disclosures are usually organised to correspond with the order and numbering of the warranties in the acquisition agreement. Each disclosure is made in relation to the particular warranty it primarily concerns. However, since many disclosures may be relevant to multiple warranties, the disclosure letter often states that each specific disclosure applies to all relevant warranties, not just the one it is directly linked to. It is worth noting, though, that some buyers may not accept this broader application.

Tax Covenant

Tax covenants usually constitute a part of the acquisition agreement and, unlike warranties, are not designed to extract disclosures regarding the target’s tax position. Disclosures rarely apply to the tax covenant, and the buyer’s knowledge of the target’s tax liabilities has no impact on their right to recover under it.

The primary purpose of the tax covenant is to ensure that any tax liabilities arising in respect of the period prior to completion are the responsibility of the seller.

Ancillary documents

In addition to the principal transaction documents mentioned above, a number of ancillary documents must be prepared and reviewed as part of the sale process. These supporting documents play a critical role in implementing and evidencing the agreed terms of the deal. They usually include board minutes authorising the transaction, resignation letters from outgoing directors, statutory forms for filing with Companies House, powers of attorney to facilitate execution of documents, and deeds of contribution (between multiple sellers).

While often perceived as administrative, these documents are vital for ensuring that the legal and corporate formalities of the transaction are properly completed and that post-completion matters proceed smoothly.

Completion and beyond

The grand finale of the acquisition transaction typically involves the signing and exchange process. This is followed by the formal closing of the transaction, known as completion. The timing and mechanics of exchange and completion may vary depending on the specific circumstances of the deal, including commercial objectives, regulatory considerations, and the readiness of the parties to proceed.

Completion may happen simultaneously with signing and exchanging of contracts, or there can be a gap between the exchange and the date fixed for completion. It can also take place at a formal meeting where all the parties and their lawyers are present or, as is now commonplace, it can be done virtually.

When completion occurs immediately following exchange, a separate set of completion procedures or documents is not required. However, where exchange and completion occur on different days – a structure known as split or non-simultaneous exchange and completion – distinct actions must be taken at each stage, and different documents are delivered accordingly, all of which are set out in the acquisition agreement.

Post-completion

There is no rest for the weary even after completion, as several important steps must be taken to finesse the transaction and ensure legal and regulatory compliance. These post-completion matters are typically coordinated by the parties’ legal advisers and vary depending on whether the transaction is a share or asset purchase.

For share purchases, main post-completion steps usually include:-

• Submitting stock transfer forms for stamping by HMRC
• Updating the company’s statutory books
• Filing the necessary forms and resolutions at Companies House

For asset purchases, post-completion steps may include:

• Paying Stamp Duty Land Tax (if applicable)
• Updating corporate records to reflect asset transfers
• Notifying customers and suppliers of the change in ownership
• Registering the assignment of intellectual property rights at the relevant registries
• Issuing employee communications, including announcements or letters confirming the transfer of employment under TUPE

Conclusion

Traversing through the world of business acquisitions requires more than just a map of common sense and general grasp of the key deal principles – it involves a strategic, studious and scrupulous approach at every step. From structuring and due diligence through to post-completion, each stage demands coordination and business, financial and legal acumen. Although the legal and procedural framework governing business acquisitions is well-established, it is filled with nuances, making professional support essential. Working with experienced legal advisers is akin to hiring seasoned scouts before taking a perilous journey, as they know the terrain they can help to avoid common pitfalls and where to look for hazards and, ultimately, how to get there faster and safer. 

If you would like to discuss any point raised in this article, please get in touch with our corporate team and we would be happy to help.