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The acquisition of private companies can be undertaken without public scrutiny and, therefore, with the following particular characteristics:
(a) Detailed commercial and financial information will be available in advance of an agreement.
(b) There will be an agreed price structure and consideration to suit both parties.
(c) There will be detailed legal documentation.
Issues of desirable information, price structure and consideration have been discussed earlier. There are often one or more intermediaries involved who have been instrumental in bringing the two parties together. They may be merchant/investment banks, or they may be specialist acquisition brokers, usually small operations and often single traders. The scale of remuneration to the intermediaries is normally a function of the final amount of consideration paid. The fees will be charged either to the acquiring or to the acquired company, depending on for whom the intermediary is acting.
An important early stage in a transaction, usually after an initial expression of interest by a would- be acquirer, is the signing of a confidentiality letter by the latter. This would normally bind the would-be acquirer legally not to disclose any confidential information received by it to evaluate the possible acquisition to third parties, unless such information were already in its possession or in the public domain. It would also require, in the event of the transaction not going ahead, any confidential papers in its possession to be returned.
Documentation for private transactions usually consists of a contract between the two parties with, inter alia, the following elements:
(a) Structure and consideration for the transaction.
(b) Warranties given by the vendor in respect of the business covering, inter alia, the following:
(i) Accuracy of all information supplied and statements made by the company to be acquired.
(ii) Value of assets and liabilities of the business at a certain date after the latest accounts and, often, trading results from the latter date, either before or after the date of contract.
(iii) No material adverse change since the latest accounts.
(iv) Specifically, collectability of debtors and saleability of stocks.
(v) Details of contingent liabilities, including guarantees, litigation, unfunded pension rights, and all material contracts and contracts with related parties.
(c) Tax indemnity covering past, current, and often future tax liabilities resulting from trading up to the date of acquisition.
(d) Limits on vendor’s liability. Both warranties and tax indemnity may give rise to financial obligations by the vendor. The document would indicate how these might be satisfied, for instance against part of the consideration withheld in the first instance.
(e) Disclosure letter. The contract will normally refer to a ‘disclosure letter’, in which exceptions to the warranties and indemnities given are noted by the vendor’s solicitors and tabled prior to contract and/or complejion. Thus, if a specific warranty was that no material litigation exists, the disclosure letter would note any legal actions currently in course. Conceptually, anything disclosed• in this letter cannot form the basis of a claim under a warranty or indemnity, since the purchaser has been made aware of it prior to contract and completion.
The contract is normally signed, with a nominated completion date, and may be conditional on one or both parties fulfilling certain conditions. These might be:
(a) No reference to the Monopolies and Mergers Commission.
(b) A satisfactory financial investigation.
(c) A satisfactory tax investigation.
In fact, both financial and tax investigations may take place before contract; between contract and completion; and even after completion. In the two latter cases they may be used as a basis for warranty/indemnity claims.
Completion is then accomplished when consideration passes in exchange for shares. However, an
important event at either or both contract or completion is the tabling of a disclosure letter, as desc above. This provides the vendor with a last chance to declare any facts which might form the basis for subsequent claims, and the purchaser to repudiate the contract.
Every group is potentially subject to takeover, and clearly, as with any asset, there will be a price at which the owners (shareholders) may be induced to sell their shares.
A problem arises, however, where a publicly quoted group, with a widely spread shareholding, receives an unwelcome (‘predatory’) bid, with the clear objective of buying the group at a price below the value that management put on it. It is important to emphasize that this is a management, as opposed to shareholders’, view, since presumably the latter, if they are induced to sell, will be happy with the transaction, on the ‘willing buyer, willing seller’ assumption.
It is also important to determine management’s motives in defending a bid strongly, ie, whether its intention is genuinely to obtain the best price for the shares, and prevent them being sold below their intrinsic value, or merely to maintain the group’s independence at any price – which may not be the best solution for shareholders.
Two further reasons for strong resistance arise from time to time, regardless of the financial benefits to shareholders:
(a) Monopoly. This is generally defined by reference to laws regulating market shares but can also involve any transaction above a defined size.
(b) Employee interest. It is occasionally argued that employment will be more secure if the group remains independent than it would be under a new employer whose objectives may be major rationalisation/divestment, which may include reductions in the workforce.
The emphasis of current political attitudes to corporate law is increasingly on the rights of employees as well as shareholders, and so employment consideration may well become increasingly important in the future.
The circumstances under which a predator may seek to buy a group at less than full value are usually as follows:
(a) The share price is depressed. This can usually be identified by:
(i) the group’s market value being below the net value of its shareholders’ funds; or
(ii) the group’s price/earnings ratio being below, or its yield being above that for its sector.
In this case, however, the predator may believe that under its management the group can recover and perform much better financially than under existing management.
(b) The group’s prospects are better than the share price would indicate. A period of fluctuating profits may be about to be followed by a good recovery. A predator might recognize this before it became apparent to the stock market as a whole, and seek to capitalize on the opportunity.
(c) The group occupies a strong position in one or more markets. The predator may see the acquisition of the group as a unique opportunity to purchase a major market share, and wish to do so without paying the market premium which should, in theory, attach to such a one- off situation.
The purpose of corporate defence is, therefore, either to obtain a full and satisfactory price from an unwelcome bidder, or to ward off the bid, and remain independent. It would also seek to ward off the bid if it felt that national economic interest, as defined by law, or employees’ interests might be seriously threatened.
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