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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.
CONTENT OF THE COURSE
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?
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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
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