Asset purchases: overview

Transcription

1 Asset purchases: overview An overview of the main considerations involved when buying a business covering: whether to buy shares or assets; the preparatory steps and preliminary agreements, due diligence timing and documents, completion and post-completion steps. Christopher Luck, Nabarro Reference: There are many ways in which a company may seek to develop its business and one is to expand by acquisition. An acquisition may be horizontal (that is, complementary to the existing business) or vertical (for example, acquiring a supplier or distributor), diversificatory (moving into new markets) or geographical. Whatever the reason, the buyer should have a clear acquisition strategy which justifies the acquisition and sets out criteria for finding an appropriate target. It should also have a clear idea of what it can afford to pay and a preference as to the nature, size and type of business it is seeking, and a timetable for implementing the acquisition (see Practice note, Due diligence and post-completion integration: acquisitions). Once a specific target has been identified, the buyer can begin to assess its value. There are various valuation methods, but the four most commonly used are discounted cash flows, market multiples, net asset valuations and dividend yields. Different methods and multiples may be used according to the industry sector of the target business. A prudent buyer may compare the results of using more than one method. Value does not necessarily equate to price, which will obviously be affected by the individual circumstances of the parties (see Practice note, Valuing a business: acquisitions). Unlike public takeover bids in the equity market, an asset purchase can only happen when a willing buyer finds a willing seller. While a buyer may have a number of reasons for wishing to expand, a seller s motives are likely to be financial or commercial ones or, more usually in a small family business, entirely non-commercial ones such as poor health, lack of management succession or even simply a wish to do something different. The financial or commercial reasons for selling can be voluntary or involuntary. Voluntary reasons include the desire to release funds for other investment or to move out of the business area because, for example, it no longer fits within group strategy. Involuntary reasons include the desire to ease financial pressures or to ward off predators who might wish to break up the group. The reason for a sale can obviously have a substantial impact on the negotiation process. Shares or assets There are two methods of acquiring a business. One is to buy shares of the company that owns the assets, the other is to buy the assets which make up the business, in some cases together with certain liabilities of the business. The two are fundamentally different. If shares in a company are purchased, all its assets, liabilities and obligations are acquired (even those that the buyer does not know about). If assets 1

2 are purchased, only the assets (and liabilities) which the buyer agrees to obtain and which are identified are acquired. An asset purchase is often more complex than a share purchase due to the need to transfer each of the separate assets constituting the business. More consents and approvals are likely to be required than on a share purchase; for example, the consent of customers and suppliers to the assignment or novation of existing contracts. There is, however, a greater amount of flexibility on an asset purchase. If, for example, a target company has liabilities which cannot be easily quantified or identified, or if only part of the business of the target company is to be acquired, then an asset purchase may be the favoured option. Theotherkeycommercialdifferencebetweenthetwotransactionsisinthenatureofwhatthe buyer acquires: on a share purchase it acquires a company owning a business and running it as a going concern (subject to any change of control provisions). In contrast, an asset purchase will not automatically transfer contracts (other than employment contracts in a relevant transfer) or existing trading arrangements to the buyer. Whether this is an advantage or a disadvantage will obviously depend on the attitudes of third party customers and suppliers, the buyer s strategy for the acquisition and how it intends to integrate the new business. As well as the commercial considerations, there are important tax considerations to be taken into account when structuring an acquisition. Tax issues There are important tax issues to be taken into account when structuring an asset sale. These are different from those that emerge on a share sale and it is quite likely that the seller s aims may not match those of the buyer when it comes to considering the tax implications of an asset or share sale (see Practice note, Share purchase or asset purchase: overview of tax issues). The key factors which may incline a buyer towards acquiring a business (in tax terms, a trade) through acquiring its assets rather than shares include: Corporation tax regime: intangible assets. If the buyer is a company within the charge to UK corporation tax (or an overseas company with a UK permanent establishment), it should be entitled to tax relief for accounting amortisation of the price paid for goodwill, intellectual property and other intangible fixed assets, provided that (broadly) it acquires them from an unrelated party (see Practice note, Intangible property: tax for details ofthis regime). Note that goodwill on consolidation arising on a share acquisition does not fall within the scope of this relief. The interaction of this tax regime for intangible assets with the regime for the exemption of gains on substantial shareholdings brings about a greater asymmetry in tax treatment between asset and share sales (for details of the exemption and the circumstances in which it applies, see Practice note, Substantial shareholding exemption: overview). Any gains realisedbythesellerfromasharesalewillbeexemptfromcorporationtaxwherethe transaction qualifies for substantial shareholdings relief, but the buyer will not be able to claim amortisation relief in respect of the purchase price. In contrast, an asset sale will be taxable for the seller but purchased intangibles will qualify for amortisation relief in the hands of the buyer. This means that careful structuring of the transaction could lead to substantial value being added while the wrong choice could cost significant amounts. 2

3 While there will be many commercial factors affecting the decision to purchase assets or shares, the importance of the tax position will generally be greater than before the substantial shareholdings and intangible assets regimes were introduced. Capital allowances. The buyer will be entitled to capital allowances for qualifying expenditure on plant and machinery, generally at 25% per annum on a reducing balance basis (or 6% for certain assets with an expected useful life of at least 25 years). Higher first-year rates may apply for small and medium-sized companies or for IT expenditure. The acquisition price for some of these assets may be higher than their current tax writtendownvalue, and hence an asset purchase may reduce the buyer s future liability to corporation tax in respect of the acquired business. Roll-over relief: chargeable gains. If "qualifying assets" are acquired, chargeable gains on other asset disposals within the previous three years, or which are expected to happen within the next year, may be deferred by the buyer or other members of the buyer s group by way of roll-over relief until the sale of the replacement assets. Roll-over relief: income gains. The intangible assets regime mentioned above also contains roll-over provisions, allowing relief if the proceeds from the sale of qualifying intangible assetsarereinvestedinsuchassets(seepractice note, Intangible property: tax). Higher base cost. The buyer will obtain a market value base cost in the acquired assets, so the profit on a subsequent sale of such assets should be calculated only by reference to the increase in value after the time of the business acquisition. In contrast, on a share acquisition, the assets remain owned by the target and therefore retain their base cost, which will often be low. Stock. An immediate tax deduction may be available to the buyer for the amount paid for any stock. Tax liabilities. The buyer will generally not take on the tax or other liabilities of the seller; on a share sale the liabilities are transferred to the buyer s group with the target company and could include secondary liability for tax owed by other members of the seller s group. Stamp duty and stamp duty land tax (SDLT). Stock, marketable securities and certain interests in partnerships will be subject to 0.5% stamp duty on transfer. (Stock and marketable securities in this context include bearer instruments, UK shares and certain types of loan capital.) Although, UK land and buildings and certain partnership interests will be subject to SDLT up to a maximum 4% charge on transfer, other assets typically transferred as part of a business purchase (for example, goodwill, intellectual property, trade debts and the benefit of contracts) are no longer within the stamp duty charge. This might mean that, depending on the nature of the assets in the target, there is no stamp duty cost for the buyer in respect of the relevant asset purchase. (For a more detailed summary of how the stamp duty and SDLT rules may apply to various assets on transfer, see Practice notes, Stamp duty, SDLT and partnerships and Stamp duty land tax.) 3

4 The factors which may incline a seller towards selling a business (in tax terms, a trade) through the sale of its assets, rather than the shares of the company through which the business is held, include: Allowable loss. If the assets are to be sold at a loss, this should result in an allowable loss which can be set against capital gains in the seller or (by special election) in another member of the seller s group (see PLC Tax Practice note, Asset purchases: tax issues for buyer and seller: Use of capital losses). In contrast, a share sale at a loss will not give rise to an allowable loss if a gain on the sale could have qualified for the substantial shareholdings exemption (see Practice note, Substantial shareholding exemption: overview). Balancing allowance. A sale of assets which have fallen in value more rapidly than their accounts depreciation may give rise to a capital allowances balancing allowance, or relief under the new tax regime for intangible assets which would not arise on a share sale. Seller s preparatory steps Ideally, a seller will be in a position to prepare for a sale and maintain control of the sale process. Whatever the reason, a seller should be sure of its objectives and plan to achieve them. One of the issues for a seller, assuming a sale is voluntary and has no particular time pressures, will be to decide whether to market the target business actively and openly, perhaps by holding a sale by auction, or whether to approach potential buyers individually. A company may already be aware of interested parties such as competitors, suppliers or distributors or the business own management. Otherwise, professional advisers can help unearth a wider field of buyers. There are a variety of steps that a corporate seller can take in order to prepare a business for sale, particularly if the seller is part of a group: Effect a pre-sale reorganisation by transferring assets intra-group. For example, the assets to be sold could be transferred into a newly-incorporated subsidiary as part of a hive down. It is no longer necessary, in the light of the capital losses rules, to transfer the asset to be sold into the group company which has capital losses; the losses will generally be available against capital gains of other group companies. Stamp duty, SDLT and other tax reliefs are generally available on transfers between UK group companies, although both reliefs may be lost on a subsequent disposal to a third party buyer (see Practice note, Asset purchases: tax overview). Identify and consider how to deal with assets which are shared by the business to be sold and other businesses within the group. These may include, for example, intellectual property and employees. Ensure that information which the buyer is likely to require as part of its due diligence exercise is readily available and up-to-date. This will include, for example, information about properties, financial information, key contracts, actual or pending litigation and so on. Preliminary agreements Before the seller and buyer get as far as negotiating the asset purchase agreement, there are a variety of agreements which they might sign: 4

5 Confidentiality agreement. Most sales will involve the buyer having access to significant information about the target business, some of which may be confidential. It is therefore standard practice for a seller to ask any prospective buyer to enter into a confidentiality agreement before making any information available (see Standard document, Confidentiality agreement: corporate seller: acquisitions). Exclusivity agreement. Embarking on a prospective purchase will usually involve a buyer in a substantial investment of time, effort and money. Buyers will often therefore seek protection against "gazumping" byrequiring the sellerto agreenot to negotiatewithother parties for a given period - often referred to as a "lock-out". Heads of terms. Parties to a proposed acquisition will often reach agreement in principle on the key terms of the acquisition before beginning the process of due diligence, disclosure and drafting the asset purchase agreement. It is common practice to record these terms in writing as heads of terms (also known as heads of agreement, memorandum of understanding or letter of intent). The basic rule is that heads of terms should cover "deal" points rather than drafting points and important deal points rather than routine points. Heads of terms are usually not intended to create any binding legal obligation on the parties, although they may contain individually binding provisions, such as confidentiality and exclusivity clauses, if these are not set out in separate agreements (see above). The clauses which are to be binding should be clearly identified. Although heads of terms may not be legally binding, most company executives consider them to be morally binding, at least in the absence of a significant new development. Theyshouldthereforebeapproachedwithcautionandpreferablywiththeinvolvement of professional advisers. For an example of heads of terms incorporating an exclusivity agreement, see Standard document, Heads of terms: asset purchases. Due diligence Objectives Once the preliminary agreements are settled, the buyer can commence the process of due diligence -thatis, gathering information about the target business (see Practice note, Due diligence and post-completion integration: acquisitions). The purpose of the information-gathering process is for the buyer to build as complete a picture as possible of the business it is buying and the issues which will be relevant to the acquisition, such as the nature and condition of, and title to assets, transfer issues and details such as timing and regulatory consents. The business may consist of a number and variety of different assets including tangible assets such as land, machinery, vehicles, fixtures and fittings, raw materials, stock, work-in-progress and office equipment and intangible assets such as the benefit of contracts, goodwill and intellectual property rights. In particular, the buyer should focus on the key asset or assets which it wishes to acquire early in the due diligence process and ensure that title can be effectively passed to it. Different businesses may be based on one or a combination of key assets such as: Property: for example, a hotel where the key asset is the building itself. 5

6 Employees: for example, a computer consultancy business or modelling agency. Intellectual property: for example, a computer software company, record company or literary agency where the business is composed of copyright, or a pharmaceutical company whose patents are likely to be crucial. Customers: for example, a manufacturer for a large retail outlet. Licence from an authority: for example, a television or radio company with an area or channel franchise. The information-gathering process will aim to find out information on a number of "specialist" areas which may impact on the negotiation process and, in particular, on the price the buyer is prepared to pay and the protection the buyer will seek from the seller in the form of warranties and indemnities (see below). Although the seller will usually give warranties which will give the buyer some comfort if a problem arises after completion, most buyers would prefer to find out about serious problems before the purchase and be able to negotiate an appropriate reduction in purchase price or, in extreme cases, pull out of the acquisition. However, the extent to which a due diligence investigation is possible may depend on the nature of the purchase. In certain circumstances, for example, where the potential buyer is a competitor, the seller may be reluctant to make sensitive commercial information, such as customer lists, available until a later stage in the negotiation process. Information sources The buyer is likely to rely on a variety of information sources as part of its due diligence. Information memorandum This is an information pack on the target business put together by the seller and its advisers. Information memoranda are often used when the seller is actively marketing a business and, in particular, when it is embarking on an auction process. Format and content of the information memorandum will obviously be a matter for the seller to decide. Essentially, however, it is a selling document and is likely therefore to summarise for a prospective buyer all of the key investment considerations. It may also have appended to it recent financial information, sales analyses, details of key personnel and descriptions of property. Buyer s enquiries The buyer s own enquiries will focus on material made available by the seller, together with searches of publicly-available material (for example, company searches, land registry searches and searches of intellectual property registers). The cornerstone of the exercise will be a memorandum of information requirements, which it will submit to the seller. This may seek to elicit much more information about the business than a seller may have included in its own information memorandum (see Standard document, Legal due diligence information request: asset purchases). Data room A third way in which information may be made available to a buyer is in a data room. Theseare commonly used on auction sales and in particular where the sale is of shares rather than assets. 6

7 (For further information on auction sales, see Practice note, Selling a company by auction.) The idea of a data room is that the seller retains physical control of all of the information and can ensure that, where there are a number of prospective buyers, they all have access to exactly the same information. Access to a data room is usually strictly controlled, for example, copying documents is usually prohibited and the use of dictating machines may also be forbidden. A buyer may also be given a limited time in which to carry out its review so careful planning is needed to ensure this is not wasted. If faced with a data room, a buyer should not be afraid to raise questions or ask for more information. Accountants report Part of the due diligence process may involve instructing accountants to prepare a report on the target business (see Practice note, Due diligence and post-completion integration: acquisitions). The buyer may also require its legal advisers to prepare a legal due diligence report. Timing and approvals A variety of consents and approvals are likely to be required for an asset purchase. These will broadly fall into two categories: contractual consents relating to the assets themselves and approvals required by statute and other regulations: Board approval. As a matter of good corporate governance, acquisitions should be considered and approved by the boards of both parties or a duly authorised committee of directors. The Combined Code on Corporate Governance provides that a board should have a formal schedule of matters specifically reserved for its consideration (paragraph A.1.1). Directors will need to declare their interests (whether director or indirect) in any proposed transaction or arrangement with the company for the purposes of section 177 of the Companies Act 1985 (2006 Act) and any relevant provision of the company s articles of association. Whether or not the relevant director can count towards the quorum for a meeting to approve such a transaction, or vote on any particular resolution to approve it, will depend on the company s articles of association. (See further, Practice note, Declaration of directors interests: Companies Act 2006.) The the 2006 Act includes a statutory statement of directors duties (for example, section 172 of the 2006 Act has replaced a director s fiduciary duty to act in good faith in the best interests of the company, and the statutory duty to consider the interests of employees under section 309 of the 1985 Act). The majority of the provisions in the 2006 Act relating to directors (other than those relating to directors conflict of interest duties, residential addresses and underage and natural directors) came into force on 1 October For further background information on the 2006 Act generally and a series of detailed practice notes, see Practice note, Companies Act 2006: materials. In particular, for further detailed information on the provisions in the 2006 Act that relate to directors, directors duties and directors interests, see Practice notes, Transactions with directors: Companies Act 2006, Directors general duties under the Companies Act 2006, Declaration of directors interests: Companies Act 2006, Directors duties: Companies Act 2006 and Declaration of directors interests: Companies Act

8 Any meeting of directors should be minuted. A party to a transaction is not bound to enquire whether it is permitted by the company s memorandum of association (that is, that it is intra vires or ultra vires), or about any limitation on the powers of the directors to bind the company or authorise others to do so (section 35B, 1985 Act). Also, in favour of a person dealing in good faith, the power of the directors to bind the company or authorise others to do so is deemed to be free of any limitation under the company s constitution (section 35A, 1985 Act). The provisions of Part 4 of the 2006 Act deal with a company s capacity and the execution of documents, and are expected to come into force on 1 October 2009 (with the exception of section 44of the 2006 Act which came into force on 6 April 2008). Forfurther information on these provisions, see Practice note, Execution of documents: Companies Act Board minutes signed by the chairman of the relevant meeting which authorise the transaction should therefore protect the other party in respect of any claim that the company exceeded its powers in entering into the transaction. Shareholder approval. Shareholder approval may be required under a company s articles of association or the 1985 Act. In the case of a UK listed company, or a company whose securities are dealt in on AIM, shareholders consent may also be required under the Listing Rules or the AIM Rules. Articles of association and shareholders agreements sometimes prevent the directors from making significant acquisitions or disposals without shareholder approval or the approval of a particular class of shareholder. Substantial transactions with a director or persons connected with him (over 100,000 or 10% of the company s net asset value (section 191(2), the 2006 Act)) mustbeapproved by shareholders (sections 190 and 259, the 2006 Act). The provisions of the 2006 Act governing substantial transactions with a director came into force on 1 October 2007, as aresultof which it is now possible for a company to enter into an agreement provided that the agreement is conditional on the relevant shareholder approval being obtained (section 190(1)(a), the 2006 Act). For further detailed information on substantial property transactions under the 2006 Act, see Practice note, Substantial property transactions: Companies Act 2006). If one party is a listed company, or a subsidiary undertaking of a listed company, and the other is a related party (that is, a director or associate), shareholder approval may be required under Chapter 11 of the Listing Rules. Shareholder approval may also be required under Chapter 10 of the Listing Rules if the transaction is a so-called Class 1 transaction (where a comparison of any one of various ratios comparing the size of the transaction to the company is 25% or more) (see Practice note, Listed and public company issues: acquisitions). Regulatory authorities. Once the buyer has established which assets it is to acquire, it will need to give early consideration to the question of whether the acquisition will trigger the need for the involvement of any regulatory authorities. These may include the competition authorities of any relevant national state, the EU or the regulator of a particular business sector (for example, newspapers, financial services, utilities, broadcasting and telecommunications). For further information, see Practice note, Competition: asset purchases. An application to the Pensions Regulator for clearance may be relevant. 8

9 For further information, see Practice note, Pensions: asset purchases and Practice note, Pensions Regulator: clearance applications. Landlord s consent. If the target s business property includes leasehold premises, it is likely that the landlord s consent will be required to the assignment. Lenders. The consent of lenders may be required if the transaction breaches borrowing covenants or the terms of security taken over the assets of the parties. Any charged assets will need to be released from any fixed charge and a non-crystallisation certificate obtained for those assets which are subject to a floating charge. Contracts. The parties should review major contracts with customers and suppliers. Some contracts (for example, licences of intellectual property) may require the approval of the other party to assignment. The other party will be required to agree to the novation of a contract. Pensions consultation requirements. See Specialist areas: Pensions below. Thenatureand extent of the approvals required will obviously have an important bearing on the timing of the transaction, as will the level of due diligence required. There is no standard timescale for an acquisition, which can take from a few days (usually the case on the purchase of assets of an insolvent company) to many months. Subject to commercial considerations, it is clearly advisable to approach landlords, key suppliers, customers and so on as early as possible so that their consent does not delay the transaction. Documenting the transaction Asset purchase agreement As the due diligence process progresses, the parties will usually begin negotiation of the asset purchase agreement, which will be the key document for transferring the assets or business to the buyer. This is traditionally drafted by the buyer and is usually fairly lengthy (see Standard document, Asset purchase agreement and its accompanying drafting note; Practice note, Asset purchase agreement: commentary and Acquisition checklist: asset purchases). Key provisions of the asset purchase agreement include: Parties. If the buyer is a group, it should decide which company within the group should make the acquisition. This will be determined by commercial and tax considerations (see Practice note, Asset purchases: tax overview). The intra-group transfer of assets after an acquisition may compromise potential warranty claims. Both parties should consider requiring the obligations of the other to be guaranteed by third parties (for example, a parent company or bank). For example, if a subsidiary company sells its entire assets and undertaking, a parent company guarantee should be obtained in respect of the subsidiary s potential liability under warranties in the asset purchase agreement. Assets to be transferred. As the only assets (and liabilities) transferred are those that are agreed to be transferred, particular care must be taken to identify and define those assets and liabilities in the asset purchase agreement. This will usually be done in the definitions section and by reference to specific schedules listing assets within certain categories. 9

10 Agreement to sell. A clause under which the seller agrees to sell and the buyer agrees to purchase the business and assets on completion. Title to some assets will pass on completion pursuant to this clause. Further formalities and documents will be required to transfer legal title to other assets (see below). Consideration. The parties should consider the nature (for example, cash, shares or loan notes) and timing of payment of the consideration. It is common on asset sales for part of the consideration to be withheld pending the production of completion accounts or acompletionstatement valuing the assets at the completion date (see Practice notes, Completion accounts and Practice note, Asset purchases: tax overview). The consideration should be apportioned between the various assets. This has important tax implications (see Practice note, Asset purchases: tax overview). The transfer of a business as a going concern is outside the scope of value added tax, although various formalities may need to be followed on the transfer of real property (see Practice note, Real property: asset purchases). Conditions precedent to completion. These will be determined largely by the consents and approvals referred to above. They may, for example, include shareholder approval, the removal of fixed charges over assets being purchased or regulatory clearances. Mechanics. The agreement will set out how the various assets are to be transferred (for example, by formal transfer, assignment, delivery, and so on) and the obligations of the parties before and after completion to perfect transfers and ensure the smooth transfer of the business. For example: the seller should undertake to continue the business in the normal course and inform the buyer of any material adverse change in its trading position; a completion clause (or schedule) will provide for various documents to be produced andexecutedatcompletiontotransferlegaltitletoassets-forexample,conveyances of real property and assignments of intellectual property (which are required to be in writing); and there are likely to be provisions relating specifically to the collection of book debts, payment of creditors and how business contracts should be dealt with - usually by assignment or novation. Warranties and indemnities. Most arms length transactions will include full warranties relating to the assets being acquired. But limited warranties may be given in some circumstances (for example, on a sale to management or where the seller is a receiver). The buyer may require indemnities to cover some potential liabilities (such as environmental clean-up costs). Restrictive covenants. These fall into three basic categories: non-solicitation of customers, non-solicitation of employees and non-compete. Disclosure letter 10

11 The disclosure letter qualifieswarrantiesgiveninthe asset purchase agreement. Itwillnormally be divided into two sections: general disclosures (relating to matters on public record and information to which the buyer has had access) and specific (relating to specific issues). The importance of the disclosure letter is often overlooked. The buyer should seek to limit general disclosures and consider carefully the specific disclosures (see Practice note, Disclosure: acquisitions and Standard document, Disclosure letter: acquisitions). Ancillary documents Most ancillary documents are required to perfect the transfer of assets; for example, property transfers and/or lease assignments, assignments and/or novations of contracts, assignments of intellectual property and so on. Other documents include board minutes, releases from charges and letters to HM Revenue & Customs. Completion and post-completion The end of the sale process represents the beginning of the new business for the buyer. Although the temptation may be to put the acquisition documents to one side, in practice the buyer should ensure that developments are monitored with an eye on warranty deadlines and restrictive covenants (see Practice note, Due diligence and post-completion integration: acquisitions). There will also be various post-completion matters for the buyer to attend to including: Announcements. Stamp duty (if relevant) and SDLT. Assignments and novations of contracts with customers and suppliers. Administrative matters such as insurance, payroll, PAYE, VAT and pensions. (See Post-completion checklist: asset purchases.) Stamp duty As mentioned above, stamp duty is payable at the rate of 0.5% on the transfer of stock, marketable securities (which includes bearer instruments, UK shares and certain types of loan capital) and some interests in partnerships. For a more detailed explanation of how stamp duty currently appliesasatax,seepractice note, Stamp duty. Formalities Stamp duty is payable within 30 days of execution of the stampable documents transferring title. SDRT StampDutyReserveTax(SDRT)isataxwhichappliestoagreementstotransfer"chargeable securities" (as defined in section 86, Finance Act 1986) for money or "money s worth". However, as a general rule, payment of stamp duty on a transfer pursuant to the agreement will "frank" the underlying SDRT charge on the agreement to transfer. SDLT SDLT is a tax on transactions involving interests in land in the UK. The tax is not triggered by the execution of a document. Instead, tax will become payable automatically on the due date, which will be30daysaftertheeffectivedateofthetransaction. Theeffectivedateisgenerally 11

12 the date that the buyer acquires the subject matter of the transaction, which may be in advance of legal completion of the transfer. The buyer, or the person acquiring the subject-matter of the transaction, must notify the Stamp Office of the transaction by making a land transaction return together with a self-assessment of the tax due. For conveyances and transfers of land, tax will continue to be charged as a percentage of the "chargeable consideration" which is defined in identical terms to mirror the SDRT definition of "money or money s worth". The rates of SDLT are set out in the table below: SDLT rates Residential Non-residential/mixed Consideration Rate Consideration Rate Not more than 0% Not more than 0% 125, ,000 More than 1% More than 1% 125,000 but 150,000 but not more than not more than 250, ,000 More than 250,000 but not more than 500,000 More 500,000 than 3% More than 250,000 but not more than 500,000 4% More than 500,000 For a more detailed explanation of how SDLT applies as a tax see Practice note, Stamp duty land tax. Value added tax VAT is potentially chargeable on the transfer of most assets used in a business, assuming that the seller is a taxable person. But the sale of a business as a going concern is generally outside the scope of VAT (article 5, VAT (Special Provisions) Order 1995 (SI 1995/1268)). For further details of transferring a business as a going concern, see Practice note, Asset purchases: tax overview: Value added tax. 3% 4% 12

13 Boxes Specialist areas Competition Asset purchases raise two key competition issues: whether the transaction as a whole is subject to merger control and whether certain restrictions that are generally entered into in connection with such transactions, such as non-compete covenants, are subject to additional regulatory scrutiny and control. Merger control UK The relevant merger control provisions are contained in the Enterprise Act 2002 (UK) and the ECMerger Regulation(EC).Either UKorEUmergerlegislation could potentially apply to asset purchases where, broadly, a business is sold as a going concern. Under the Enterprise Act 2002, a merger qualified for investigation by the Office of Fair Trading where either the combined share of supply of a market(s) in the UK (or a substantial part of it) is at least 25% or the value of the turnover of the target company exceeds 70 million. At the end of its investigation, the Office of Fair Trading can clear the transaction or make a referral to the Competition Commission for further investigation. In certain circumstances, it can accept undertakings from the parties in lieu of a referral. If the transaction is referred, the Competition Commission will carry out a more in-depth investigation to determine whether it is likely to result in a substantial lessening of competition. If it decides there could be an anti-competitive outcome, it can assess whether there are any suitable remedies. If no satisfactory remedies can be found, the transaction can ultimately be blocked. EC merger control The EC Merger Regulation (Council Regulation 139/2004, OJ 2004 L24/1) applies to large-scale multi-jurisdictional transactions. The transaction will only fall within the scope of the Merger Regulation if the relevant turnover tests are met. These tests take into account the combined aggregate worldwide and Community turnover of all the undertakings concerned. They are unlikely to apply where the aggregate worldwide turnover of all the undertakings is below EUR 2,500 and the aggregate Community turnover is below EUR 100 million. Ancillary restrictions Restrictive agreements (such as non-compete provisions, supply and purchase agreements or IP licences) that are directly related and necessary to an asset purchase transaction subject to the UKor ECmerger rules (see above) and notified to the competition authorities maybenefit from approval from the competition authority as part of that investigation process. Other restrictive agreements or covenants are subject to the normal provisions of UK and EC competition law. The Competition Act 1998 took effect on 1 March The UK now adopts an approach to restrictive agreements which is broadly in line with Article 81 of the EC Treaty (see Practice note, Competition: asset purchases.). Restrictive provisions (such as non-compete clauses) may potentially infringe Article 81 of the EC Treaty, under which an agreement that has as its object or effect the prevention, restriction 13

14 or distortion of competition within the common market, and which may affect trade between member states, is prohibited. Employees Asset purchases may be regulated by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (which replaced the 1981 version of the regulations with effect from 6 April 2006) (TUPE). Broadly, if there is a business transfer or a service provision change, employees engaged in the business will be transferred to the buyer on their current terms of employment. Both the seller and the buyer must inform (and possibly consult) with appropriate representatives of any affected employees (see Practice note, Employment: asset purchases). Pensions Application to the Pensions Regulator for clearance It is possible that an application may be made to the Pensions Regulator for clearance. This is effectively confirmation from the Regulator that it is satisfied that the transaction is not being enteredintoasameansofavoidingpayingadebtowedtoapensionschemeor,otherwisethan in good faith, preventing a debt from becoming due. It is less likely to be appropriate in the case of an asset purchase than a share purchase but may be relevant if, for example, following the transfer an employer participating in the seller s scheme will no longer have any employees who are members or prospective members of the scheme. The parties should consider at the outset whether a clearance application should be made. For further information, see Practice note, Pensions: asset purchases and PLC Pensions, Practice note, Pensions Regulator: clearance applications. Strictly, TUPE does not apply to most rights under occupational pension schemes (regulation 10(1), TUPE). However, the Pensions Act 2004 now requires buyers to make certain minimum pension provision for some employees following a TUPE transfer (see Practice note, Pensions: asset purchases). The parties should therefore consider carefully what to do if transferring employees are part of an occupational pension scheme. Where a buyer is to provide future pension benefits, it is possible (though less common than in the past) to provide that the value of accrued benefits will be transferred to the buyer s scheme. Such atransferisknownasabulk transfer. Provisions dealing with this and interim arrangements will normally be included in a schedule to the asset purchase agreement (see Practice note, Pensions: asset purchases). Benefits under an occupational scheme which are not benefits for "old age, invalidity or survivors" transfer under TUPE (regulation 10(2), TUPE). The ECJ decision in Beckmann v Dynamco Whicheloe Macfarlane Ltd [2002] 2 CMLR 45 means that: Redundancy benefits payable under the pension scheme will transfer. Other benefits payable before normal retirement may also transfer. This will apply to benefits under the seller s current pension scheme, but may also apply to any benefits under schemes run by any previous transferors of the business. Therefore, buyers should ensure that they make appropriate enquiries and obtain the necessary protection. For further information on the decision in Beckmann,seeArticle, Transfer of early retirement benefits, PLC Magazine,

15 Regulation 10(3) of TUPE specifically restricts the possibility of claims against the seller for loss or reduction in pension rights following a TUPE transfer if the buyer does not provide pension benefits at least asgoodastheseller. It expressly statesthat transferring employeesmay not bring a claim for unfair constructive dismissal or breach of contract as a result of the reduction or loss of pension rights under an occupational pension scheme if the TUPE transfer takes effect on or after 6 April If the employer of transferring employees contributes to a pension arrangement which is not an occupational pension scheme (such as a personal pension scheme or stakeholder scheme), the employer s obligations transfer under TUPE. Pensions consultation requirement Sections 259 to 261 of the Pensions Act 2004 (PA 04) and the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 (in force from 6 April 2006) require most employers in relation to occupational or personal pension schemes who have (currently) 100 or more employees to consult where employers or trustees are proposing to make "listed changes" to active or prospective members pension arrangements. It is arguable that the requirements apply to private M&A transactions. (This consultation obligation is in addition to any other consultation requirements, for example, under TUPE or the Information and Consultation Regulations 2004.) Listed changes include the removal of the employer s liability to contribute or, in the case of money purchaseschemes only, any reduction in employer contributions. This will beparticularly relevant if all the employees of an employer are transferring across. Although this is an obligation of the seller, it affects the buyer in terms of the timetable for the transaction because specified written information must be given to all affected members at least 60 days before the proposed effective date of the change, followed by a consultation period. For further information, see PLC Pensions, Practice note, Consulting with employees on pension changes. Property Property may comprise an important part of the business assets. Due diligence will include inspection of the properties and a variety of searches. Where necessary, the buyer should involve experts such as surveyors and valuers. There are two main ways in which a buyer can derive comfort on title: certificates of title given by the seller s solicitors or investigation of title by the buyer s solicitors. The buyer is likely to require full property warranties, although the seller may argue that it should rely on answers to enquiries and certificates or investigation of title. If a lease is being acquired, landlord s consent to assign will be necessary. The landlord should be approached as early as possible to avoid unnecessary delays (see Practice note, Real property: asset purchases). Environmental issues The importance of environmental issues in the context of transactions has grown considerably in recent years. The risk of criminal or civil liability falling on the buyer means that environmental problems can have a big impact on costs and the value of the business acquired. If, for example, the buyer is acquiring property which has been put to industrial use, it should consider commissioning a full environmental survey and insist on full warranties and/or indemnities (see Practice note, Environment: asset purchases). 15

16 Intellectual property Intellectual property rights exist in every business, but may have differing importance according to the nature of the business and the processes involved (see Practice note, Intellectual property: asset purchases). The buyer s enquiries should establish what rights are owned by and used in the business. Intellectual property rights may be formally assigned or licensed. If they are already used by the business under licence, the approval of the licensor is likely to be required to the transfer. Consideration should also be given to intellectual property rights, which may need to be shared after the acquisition. Information technology The buyer should establish how reliant the target business is on computer systems. Where acomputersystemistobetransferred,thebuyershouldcheckthatthesellerhastheability to transfer the system, what is to be transferred and how the transfer is to be effected. If the target business is not heavily reliant on its computer system, the buyer may agree to transitional arrangements with the seller until such time as programs and data can be transferred to the buyer s own system. Date-change compliance and euro capability have also become important issues when acquiring a business. The buyer will need to carry out appropriate due diligence on the seller s systems in relation to these matters. The transfer of a computer system may take place in several different ways. Hardware may be transferred as an asset, but copyright in any software can only be transferred by specific written agreement. The arrangements may also involve third party consents, which must be built into the timetable (see Practicenote,TransferringIT systemsand Standard document, Computer services agreement: skeleton). 16

17 Article Information RESOURCE INFORMATION The fulltext is available at General Article ID: Document Generated: 26/09/08 03:20:04 Resource Type Practice note: overview Jurisdiction United Kingdom Subject Acquisitions: private (assets) References Stampdutyland tax ( Subsidiary undertaking ( Execution of documents: Companies Act 2006 ( Pensions: asset purchases ( Listed and public company issues: acquisitions: the 1 July 2005 regime ( Company Law Reform Bill: transactions with directors ( Companies Act 2006: materials ( Assetpurchases: tax issues for buyer and seller: Use of capital losses ( Substantial shareholding exemption: overview ( Valuing a business ( Due diligence ( Completion accounts ( Sellingacompany by auction ( 17

18 Confidentiality agreement: corporate seller: acquisitions ( Disclosure letter: acquisitions ( "Business sale agreement" ( "Competition" ( "Employmentissues on asset purchases" ( "Pensions considerations on asset purchases" ( Transferring IT systems ( Acquisitionchecklist: asset purchases ( "Post-completion" ( Asset purchase agreement ( Data room ( Heads of agreement ( Letter of intent ( Stampdutyland tax (SDLT) ( Directors' duties: Companies Bill (formerly known as the Company Law Reform Bill) ( Pensions Regulator: clearance applications ( Computer services agreement: skeleton ( Transfer of early retirement benefits ( Headsofterms: asset purchases ( Capital allowances ( Asset purchase agreement: drafting note ( Environment: asset purchases ( : SDLT and partnerships ( Taxation of intangible property ( Legal due diligence information request: asset purchases ( 18