Part 2: • Negotiating the Transaction The Deal Team – Should comprise at a minimum: • • • • • • Corporate Finance lead; M&A Legal lead; Commercial/Business Lead; Integration Lead from the business; Tax lead Finance lead – Other specialists/subject matter experts: • Competition, HR legal & HR business, to be called upon as required (potentially on a “no target name” basis if the deal is particularly confidential) Kick off Meeting • The Corporate Finance & M&A Legal Lead should schedule a kick off meeting with the deal team. • Helpful to circulate a contacts sheet with roles and responsibilities of each deal team member • During this session the process should be explained to the deal team (and tailored according to the level of experience of each member) L Kick off Meeting Non-Disclosure Agreement • Should be negotiated by M&A Legal and Corporate Finance Lead • Signed by Corporate Finance lead • Include requirement for target and their advisers to keep confidential buyers involvement in transaction • To the extent buyer is providing information be drafted 2 way with buyer benefiting from full suite of protections • Deal team should be made aware of buyers confidentiality obligations Insider List • M&A Legal lead and Corporate Finance Lead should consider if an insider list is required • If so, it should include: – The deal code name (Project “X”); – Name of each deal team member, date they became an insider and why they are an insider; – Deal team should be made aware of the insider list and that they should only discuss the deal with people on the list – Best practice to circulate a note on confidentiality to the entire deal team Insider List – Where shares of the seller or target are listed on a recognised stock exchange the M&A Legal Lead should make the deal team aware of: • The insider dealing provisions in the Criminal Justice Act 1993 (or equivalent legislation in relevant jurisdiction) • The civil offence of market abuse under the Financial Services and Markets Act 2000 (or equivalent legislation in relevant jurisdiction), which applies to both individuals and corporates Engaging Externals • Whether external lawyers or financial advisers/consultants are required will depend on the size and expertise of the buyers internal team • Some tips for successful engagement are: – Legal and Corporate Finance to work together to negotiate and finalise the engagement letters; – Clear demarcation of the responsibilities of the advisers to ensure on duplication of effort and/or that nothing is missed; – Regular due diligence calls between internal team and external advisers to flag any material issues; International Transactions • Subject to the overriding caveat of confidentiality the M&A legal lead should work closely at an early stage with the local legal lead/external adviser to understand: – Any impact of the foreign countries laws on the transaction (i.e. employment laws that make post acquisition reorganisation prohibitive?) – Are provisions such as non-compete clauses enforceable in the relevant jurisdiction? International Transactions – Any foreign ownership restrictions that require approval in the target territory? – Any obligations to negotiate in good faith/share confidential information? – Ensure the Due Diligence questionnaire is capable of use across jurisdictions – Remember to consider cultural impact of “investigations” in target jurisdictions – may be seen as a sign of mistrust or bad faith Structuring & Tax • Consider Share Sale (shares of the target) vs. Asset Sale (the business/assets of the target) • Will consideration be wholly cash or will non-cash consideration such as loan notes/shares be used? • What are the tax implications of the proposed structure? Early engagement with your internal and/or external tax advisers is recommended! Valuation/Pricing of Target • Ensuring the price offered/paid for the target reflects the value of the company/assets is a vital consideration from the outset • Corporate Finance will lead on the valuation of the target • M&A lead should seek to understand the value drivers to ensure they are protected in the transactional documentation and that these can be (if appropriate) passed on to the external advisers to focus their advice. Valuation/Pricing of Target • M&A Legal lead to ensure that any adverse due diligence findings are communicated to the Corporate Finance lead so that they are considered in the overall valuation Price Adjustment Mechanism • Corporate Finance should sign off on any price adjustment mechanism used (e.g. completion accounts, locked box) • Need to review in conjunction with the relevant provisions in the sale documentation • Should also consider advice from external legal and tax advisers (where appropriate) Warranties What are warranties? Contractual statements made by Seller as to the condition of the affairs of the target company 2 main purposes of the warranties: • remedy if the statements prove to be incorrect and the value of the company is thereby reduced. • To encourage the seller to disclose known problems seller's liability is limited to the extent that proper disclosure is made against them (disclosure letter and disclosures) Warranties • M&A Legal lead, Corporate Finance, business lead and integration lead (and specialists) need to work closely together to ensure the sale agreement contains adequate warranties to: – Flush out risk; and – Provide the buyer with a damages claim if breached • Need to ensure seller’s cap on liability and de minimis caps are set at an appropriate level for the deal size Indemnities • Indemnities should be negotiated to protect the buyer from for losses arising from identified diligence risks • Early disclosure should be requested in order to allow sufficient time for any issues arising from the process to be addressed Completion Conditions • Completion conditions may include any of the following: – Competition clearance – Regulatory clearance – Third party consents to change control provisions – Tax clearance – Restructuring of the target – Completion of HR requirements Completion Conditions • Remember to set out in the sale documentation: – How the target will be run in the period between signing and completion; – Which party bears the financial risk/receives the financial benefit of that period; – Whether any particular protection is required by the purchaser for a breach or warranty or material adverse change arising during that period; – What happens if a condition is not fulfilled? Contractual Protections • Where appropriate seek to include restrictions in the sale documentation to preclude the seller from damaging the newly acquired business such as: – Non-compete covenants – Non-solicitation of employees or customers – No announcements to be made to customers or employees without agreeing the form with the buyer