Corporate Finance Training Courses from Roger Baden-Powell

A “good deal” is a function of both the terms under which an exchange of contracts takes place and the price paid or received on completion of a sale and purchase agreement. A high price is no good to a seller if a large portion of the proceeds of sale needs subsequently to be handed back to a buyer in order to compensate for breaches of warranty. Similarly, a low price is not particularly advantageous to a buyer if the assets acquired prove to be subject to unexpected defects for which no redress is enforceable against the seller.

The drafting of a Sale & Purchase Agreement seeks to ensure that a buyer receives what was anticipated and that a seller can walk away with confidence that its continuing liabilities are both known and quantifiable. As a compromise between these two extremes, the drafting of warranties and indemnities identifies the risks in a deal and decides upon whom they should fall.

Structure of a Sale & Purchase Agreement

• Letters of Intent & Heads of Agreement – agreements leading up to the SPA
• Definitions – remove complexity from the body of the document
• Exchange & Completion – two separate exercises, preferably contemporaneous
  • Pre-Conditions – allow the buyer to slide out of the deal
  • Covenants – negative or positive promises
• Boilerplate Clauses – non contentious regulation of the contract
• Schedules – details at the back of the document
• Comfort Letters & Side Letters – useful to oil the wheels of the deal

Representations, Warranties & Indemnities

• Drafting Objectives – what do the parties wish to achieve?
• Purpose of Warranties – retrospective alteration of the price & extracting disclosure
  • Transfer & Retransfer of Risk – a game of tennis where the risk is the ball
  • Long & Short Form Warranties – What is the difference, if any?
• Warranties Given by the Seller – to ensure that the buyer gets what is promised
• Warranties Given by the Buyer – to underpin the value of consideration shares
• Indemnities Given by the Seller – to counteract the effect of a buyer’s knowledge

Completion Meetings

• Management of the Meeting – importance of forward planning & a clear agenda
• Solicitors’ Undertakings – smoothing the Way
• Timing Problems – remove any sand from the machine before starting the meeting
  • Release of Charges – deed of release & letter of non-crystallisation
  • Money Transfers & Funding the Buyer – are the formalities in place?
  • Consideration to be Paid in Shares – do they exist and are they to be listed?
• Completion in Escrow – only if completion almost certain with negligible time delay

Who Should Give Warranties?

Dual Purpose of Warranties – to extract information & impose liability

• Executive Shareholders – should passive shareholders give warranties?
• Management Buyouts – should selling shareholders give warranties?
• Receivers & Administrators – vague assurances or something better?
• Listed Companies – the ultimate caveat emptor deal

What is Disclosure?

• Reasons for Disclosure – limitation of seller’s liability
• Warrant the Disclosure Letter and/or Due Diligence Reports? – the buyer will ask
• Defective Disclosure by the Seller’s Management – sue them for negligence?
• General Disclosures – negotiation surrounding example clauses
• Fair Disclosure – vague & ambiguous disclosures will be ineffective
• Deliberate Non-Disclosure – tell the lawyers?

Effect of the Warranties

• Breach of Warranty – if the nature of assets or liabilities doesn’t match expectations
  • Misrepresentation – innocent, non-contractual, negligent or fraudulent?
  • Rescission – when can a buyer tear up the contract?
  • Damages – different quantum under contract and tort
• Purchaser Extends Vendor’s Liability – casting a wider net over the seller
  • Widening the Definition – extending the meaning of a warranty
  • Management Accounts – will the seller warrant them?
  • Security for Warranties and Joint & Several Liability – aim for the best target
  • Full Title Guarantee – tightening the provisions of the Law of Property Act
• Seller Limits Liability – reduce the effect of inducements given to the buyer
  • Narrowing the Exposure – the effect of an ‘Entire Agreement’ clause
  • Unexpected Benefits – achieve a level playing field
  • References to Statutes – avoid the impact of retrospective legislation
  • Limitation Periods – seller’s liability does not continue for ever
  • Floors & Ceilings – thresholds, baskets & caps
  • Debt Collection & Pursuit of Debtors – make the buyer behave responsibly
  • Conduct of Claims – different attitude to commercial claims & tax claims
  • Insurance Against Warranty Claims – worthwhile but usually considered too late
• Date of Application – when do warranties bite?
  • Interregnum Provisions – what happens between exchange and completion?

Completion Accounts

• Comparison to Audited Accounts – contentious rather than consensual
• Mechanisms – net assets or cash free/debt free normal to actual working capital
• Limiting Areas of Potential Dispute – cash, debt, stock, WIP, fixed assets, debtors
• Locked Box Transactions as an Alternative – when and how is the box locked?
• Which to Choose and why? – differences to be considered