Corporate

A business can be acquired by either an asset purchase or a share purchase.

If an asset purchase is used then the buyer is able to select which assets and liabilities they wish to acquire from the seller together with the business in which those assets are used (“Target Business”). The company carrying out the Target Business is not acquired by the buyer.

If however the share purchase method is used then the buyer will take over the ownership of the company carrying out the business (“Target Company”). The Target Company will be sold with its assets, obligations and liabilities. These are acquired irrespective of whether or not the buyer was aware of them.

The decision to proceed by virtue of a asset purchase rather than an share purchase is influenced by a number of factors, including without limitation the following:

• The type and volume of assets used by the Target Company whilst conducting its business;
• If there any difficulties within acquiring any key assets of the Target Company (for example where there may be an issue with obtaining third party consent);
• The liabilities within the Target Company; and
• The tax treatment of transaction.

Generally a seller will prefer to dispose of their shares in the Target Company as opposed to allowing the buyer to acquire the assets of the Target Company. This is because a share sale would mean that the buyer would acquire all of the liabilities, both known and unknown, which are in the Target Company. Therefore, the seller would be absolved of any responsibility in relation to these.

However, depending upon the time frame agreed with the seller, the seller will remain liable to the buyer with respect to the Target Company’s business affairs pursuant to the terms of the warranties and indemnities which will have been agreed as part of the transaction. There is likely to be a cap with regards to the seller’s total liability in relation to the Target Company and this is usually limited to the purchase price that the buyer will have agreed to purchase the Target Company for.

Therefore as a result of any unknown and therefore unquantifiable risks a buyer may wish to proceed by way of an asset sale so that they can choose which assets and liabilities they will acquire and specifically excluding those which they do not wish to acquire.

At the outset of any disposal or acquisition of a private limited company it is important that all parties consider the following potential issues, such as:

• Finance;
• Tax;
• Competition;
• Intellectual property rights;
• Property;
• Environmental; and
• Pensions.

Should there be a disposal or an acquisition of a listed company then there would need to be an analysis of their additional obligations.

Before entering into a joint venture arrangement there are a number of issues to consider. Some of the preliminary issues to consider are as follows:

• The structure;
• The contributions and interests of the parties;
• The accounting and tax treatment;
• If there are any legal requirements that must be complied with prior to entering into the joint venture arrangement;
• If there is a need for a confidentiality agreement exclusivity agreement and/ or heads of terms before the joint venture arrangement is entered into; and
• Whether due diligence needs to be undertaken.

The structure

The usual structures used when setting up a joint venture include the following:

• Corporate joint ventures;
• Partnerships, by virtue of a partnership, a limited liability partnership or an unlimited partnership; or
• Contractual relations.

The structure adopted by the parties is wholly dependent upon the circumstances of the matter. However, the parties will need to consider:

• The statutory framework;
• The distinct legal personality;
• Liability;
• Flexibility; and
• Publicity.

The contributions and interests of the parties

Prior to entering into the joint venture the parties must decide the extent of their own interests within the joint venture. This may include how the equity within the joint venture is to be divided. There will also need to be consideration given as to how the joint venture is to be managed, controlled and funded. It may be the case that each party provides certain assets and resources to the joint venture and as such how they are to be provided needs to be document. Ultimately, however, consideration needs to be given on how each of the parties funds are to be extracted from the joint venture.

The accounting and tax treatment

Advice will need to be sought from the parties accountants as to how the joint venture should be structured to ensure tax efficiency for them.

Legal requirements

Prior to entering into the joint venture it may be necessary to obtain certain consents such as those from the relevant competition authority or industry specific consents. If one of the parties is listed then they would need to consider any regulatory announcements.

Preliminary documents

Consideration should be given by all parties to any documents that should be put in place prior to the joint venture arrangement being put into place. This can include the following:

• A confidentiality agreement: which would ensure that any information provided between the parties prior to entering into the joint venture arrangement is confidential. It would also be legally binding in the event that the parties decided to no longer pursue the joint venture arrangement;
• An exclusivity agreement: which would ensure that both parties were only in negotiation with each other and not with any third parties. Ordinarily there would be a limitation on this as to the time period of the exclusivity to ensure that both parties are not tied to each other indefinitely; and
• Heads of terms: which although not legally binding (except as to confidentiality and exclusivity clauses) would document the basic terms which the parties would like to include within the final legal documentation.

Due Diligence

The parties may wish to undertake due diligence on each other to ensure that each party is able to provide the required due care and resources to the joint venture. It may also be the case that each party undertakes due diligence against the business or assets being transferred to the joint venture to ensure that the providing party has the appropriate consents and authority to do so. Ultimately the scope of any due diligence will be determined by the parties’ circumstances and the structure proposed.

The shareholders of the company may decide to deal with their own interests by virtue of entering into a contract with some or all of the shareholders. Such a contract would create personal obligations, or a personal exception against themselves only, and do not form part of the regulations or constitution of the company. They also do not become binding on the transferees of the parties to the shareholders agreement or upon new or non-assenting shareholders.

Although a provision in the company’s of association which would restrict the company’s statutory power to alter its articles of association or a formal undertaking to that effect, which would be invalid, any such agreement outside of the articles of association as to how the shareholders exercise their voting rights on a resolution to alter the articles would not necessarily be invalid.

Pursuant to the relevant sections of part 18 of the Companies Act 2006 (“CA 2006”) a limited company may buy back shares in itself. This is often known as either a purchase of own shares or a share buyback.

If the company is listed or an AIM company then there are provisions in addition to those contained within the CA 2006 which would need to be complied with.

There are two types of share buybacks, namely:

• An off-market purchase of shares; or
• A market (“on-market”) purchase of shares.

The type of share buyback determines the statutory procedure to be followed as each one has its own requirements.

A share buyback is classed as off-market if the shares are:

• Purchased otherwise than on a recognised investment exchange; or
• Purchased on a recognised investment exchange, but they are not subject to a marketing arrangement on the exchange.

A share buyback is classed as on-market if it is made on a recognised investment exchange and is subject to a marketing arrangement on that exchange. Effectively this means that the on-market is not an off-market purchase.

The effect of both an off-market purchase and an on-market purchase is that:

• A private limited company carrying out a share buyback will always make an off-market purchase;
• If a public limited company does not have its shares traded on a market then it will always make an off-market purchase; and
• If the company is listed or an AIM company then it may make a market purchase or an off-market purchase.

The legal framework which applies to general partnerships is the Partnership Act 1890 (“Act”).

Under the Act a partnership is described as a relationship that exists between persons who carry on a business with a common view to making a profit.

It must be noted that the Act does not provide a complete code for partnership law and it expressly preserves the rules of equity and common law.

A partnership formed under the Act is not a separate legal entity from its partners. Therefore the partnership cannot acquire rights, incur obligations or hold property. It is therefore imperative to distinguish what is partnership property and what belongs to the individual partner.

The partners of the partnership act as the partnerships agents. They also act as agents for the other partners of the partnership and therefore can bind the partnership, thereby also binding the other partners, by any actions that are undertaken in the ordinary course of the partnership business.

Each of the partners owes a duty of good faith to the other partners in all of their partnership dealings. The relationship between each of the partner is of a fiduciary nature.

Each partner is jointly liable with the other partners for all of the debts and obligations which the partnership incurs whilst they are still a partner. Potentially such personal liabilities are unlimited and therefore this is something which should be considered when deciding whether to use a partnership formed under the Act as a business vehicle.

Forming a general partnership

In order to create a partnership two people may simply start to carry on a business and share the profits. This, subject to fulfilling the criteria of the Act, may be sufficient for the partnership to be formed. Whether or not the criteria have been met is a matter of fact.

Any partnership that carries on a business in the United Kingdom under a trading name must make certain trading disclosures on its business documents and also at its business premises.

Partnership agreements

If there is no partnership agreement to govern the partnership then the Act provides that the default provision will apply. These provisions include:

• That the partners are entitled to share equally in the capital and the profits of the business;
• That the partners are jointly liable to make equal contributions to any losses of the business;
• That every partner is entitled to take part in the management of the partnership;
• The consent of all of the partners is required before a new partner is admitted to the partnership;
• If there is no fixed period of time for the partnership, then by giving notice to all of the other partners it can be determined; and
• That the partners are not entitled to be paid for acting in the business of the partnership.

It may be the case that the default provisions of the Act do not suit the manner in which the partners wish to run the business. The partners can therefore modify the provisions of the Act by entering into a partnership agreement. The partnership agreement is a private document and is therefore not filed on a public register. The partnership usually contains provisions relating to:

• Profit sharing;
• Duration;
• Termination;
• The exit and expulsion of partners; and
• How losses are to be divided between the partners.

Ending a general partnership

The Act does not contain a statutory definition for the dissolution of a partnership, but the term is used to refer to the end of the partnership. There are two types of dissolution, either technical or general.

Technical dissolution occurs when there is a change in the composition of the partnership. Examples of this would be if a partner retires or dies or a new partner is admitted to the partnership. Effectively this means that the partnership in existence before the change in composition is deemed to have dissolved but that the new partnership will continue the business of the dissolved partnership. In such instances there is no need to wind up the partnership’s affairs.

A general dissolution of the partnership occurs where a partnership is dissolved and is then followed by a winding up of its affairs. The dissolution can take place by:

• By an order of the Court;
• By a partner giving notice (subject to an agreement to the contrary);
• The expiry of a fixed term;
• By completion of the stated purpose of the partnership;
• The death or bankruptcy of a partner (subject to an agreement to the contrary in which case the event will only result in the technical dissolution of the partnership);
• By a charging order (this is at the option of the partners);
• If something occurs which makes it unlawful to carry on the partnership. An example of this would be a change in the law; or
• By the agreement of the partners.