2021 - Corporate Acquisitions and Mergers in The UK - 3ed

NILUFER VON BISMARCK OBE
CORPORATE ACQUISITIONS AND MERGERS IN THE UNITED KINGDOM

Corporate Acquisitions and

Mergers in the United Kingdom
2021. Kluwer Law International. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
THIRD EDITION
CORPORATE
Derived from Kluwer’s multi-volume Corporate Acquisitions and Mergers, the largest and most
ACQUISITIONS
detailed database of M&A know-how available anywhere in the world, this work by a highly
experienced partner in the leading international law firm Slaughter and May provides a
concise, practical analysis of current law and practice relating to mergers and acquisitions of
public and private companies in the United Kingdom. The book offers a clear explanation of
AND MERGERS IN
each step in the acquisition process from the perspectives of both the purchaser and the seller.
Key areas covered include: structuring the transaction; due diligence; contractual protection;
consideration; and the impact of applicable company, competition, tax, intellectual property, THE UNITED KINGDOM
environmental and data protection law on the acquisition process.
Corporate Acquisitions and Mergers is an invaluable guide for both legal practitioners and
business executives seeking a comprehensive yet practical analysis of mergers and acquisitions
in the United Kingdom.
THIRD EDITION
Equivalent analyses of M&A law and practice in some 50 other jurisdictions, all contributed
by leading law firms, are accessible on-line at www.kluwerlawonline.com under Corporate
Acquisitions and Mergers.
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Corporate Acquisitions and Mergers
in the United Kingdom
Third Edition
Nilufer von Bismarck OBE

Slaughter and May
This book was originally published as a chapter in Corporate

General Editor: Peter Begg

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Contents
Slaughter and May ................................................................ v
1 Definitions ...................................................................... 1
2 Private Acquisitions .......................................................... 4

2.1 Overview ............................................................... 4
2.1.1 Introduction ............................................. 4
2.1.2 The Type of Acquisition: Shares or Assets? . 5
2.1.3 Summary of Legislation and the Regulatory
Framework................................................. 8
3 Preliminaries ................................................................... 11
3.1 Heads of Agreement, Confidentiality Undertakings,
and Exclusivity Agreements .................................... 11
3.1.1 Heads of Agreement ................................. 11
3.1.2 Confidentiality Undertakings .................... 13
3.1.3 Exclusivity Agreements .............................. 15
3.1.4 Are Heads of Agreement Desirable? ........... 16
3.2 Due Diligence ....................................................... 17
3.2.1 Introduction ............................................. 17
3.2.2 Caveat Emptor and the Limitations of
Contractual Protection .............................. 18
3.2.3 The Importance of Due Diligence ............. 18
3.2.4 The Due Diligence Questionnaire .............. 19
3.2.5 Third-Party Confidentiality ........................ 21
3.2.6 Legal Privilege .......................................... 21
3.2.7 Tracking Information ................................ 22
3.2.8 Data Rooms .............................................. 23
3.2.9 The Purchaser’s Knowledge and Due
Diligence .................................................. 23
3.2.10 Seller’s Failure to Answer Enquiries ........... 24
3.3 Contractual Protection ........................................... 24
3.3.1 Warranties ................................................ 24
3.3.2 Multiple Sellers ......................................... 33
3.3.3 The Disclosure Exercise ............................. 35
3.3.4 The Seller’s Limitation on Liability ............ 44
3.3.5 Consideration ........................................... 48
3.3.6 Allocation of Consideration on an Assets
Deal and Remedies .................................... 54
3.3.7 Acquisition Finance: Debt Versus Equity ..... 54
3.3.8 Completion Accounts ................................ 60
3.3.9 Merger and Acquisition Accounting ........... 64
3.3.10 Deferred Consideration and Earn-Outs ...... 67
iii

CORPORATE ACQUISITIONS AND MERGERS
3.3.11 Acquisitions and Disposals by Listed

Companies ............................................... 70
3.4 Specialist Areas ...................................................... 72
3.4.1 Competition ............................................. 72
3.4.2 Intellectual Property and Information
Technology ............................................... 78
3.4.3 Tax............................................................ 84
3.4.4 Property ................................................... 92
3.4.5 Environmental Aspects .............................. 96
3.4.6 Data Protection ......................................... 99
3.4.7 Employment ............................................. 105
3.4.8 Pensions ................................................... 115
3.5 Auction Sales ......................................................... 120
3.6 Acquisitions of Public Companies ........................... 131
3.6.1 Introduction ............................................. 131
3.6.2 The Regulatory Bodies .............................. 137
3.7 Takeover Control ................................................... 138
3.7.1 Prospectus Requirements and the Listing
Rules ........................................................ 138
3.7.2 The City Code .......................................... 140
3.7.3 Concepts in the City Code ........................ 142
3.7.4 Legislation ................................................ 144
3.7.5 Inducement Fees ....................................... 147
3.8 Takeover Offers: Key Provisions of the City Code .... 148
3.8.1 Preparation of an Offer ............................. 148
3.8.2 Documents from the Offeror and Target
Board ....................................................... 160
3.8.3 Defences to a Hostile Offer ....................... 165
3.8.4 Timing ..................................................... 168
3.9 Dealing and Disclosure Requirements Prior to an
Offer Announcement and During an Offer Period .. 172
3.9.1 Stakebuilding and Dealings ....................... 172
3.9.2 Disclosure ................................................. 178
iv

Slaughter and May

Slaughter and May is a leading international law firm recognized throughout the
business community for its commercial awareness and commitment to its clients.
Slaughter and May has a diverse and extensive international practice advising
on a full range of commercial, financing, and other matters with a commitment to
delivering top-quality legal advice, combined with commercial awareness and a
‘can do’ approach.
Clients look to Slaughter and May for technical excellence in the law, a capacity
for innovative thought, and a positive attitude. Together, these qualities give
Slaughter and May an edge in negotiation, help achieve clients’ commercial objec-
tives, and ensure the effective handling of transactions.
Author
Nilufer von Bismarck OBE, Partner. Nilufer von Bismarck has a broad financing,
corporate, and commercial practice. Her practice includes private and public
mergers and acquisitions, joint ventures, IPOs, and other FCA work, financings,
equity and debt capital markets transactions, and corporate governance. Nilufer
has worked in a range of industries, including financial services, telecoms, infra-
structure, retail, media and pharmaceuticals.

vi

1 DEFINITIONS
Accounting Regula- Large and Medium-sized Companies and Groups

tions (Accounts and Reports) Regulations 2008 and the Small
Companies and Groups (Accounts and Directors’
Report) Regulations 2008
AIM Alternative Investment Market of the London Stock
Exchange
CA85 Companies Act 1985
CA06 Companies Act 2006
City Code City Code on Takeovers and Mergers
CJA Criminal Justice Act 1993
CMA Competition and Markets Authority
CTA10 Corporation Tax Act 2010
Data Protection UK GDPR and the Data Protection Act 2018
Legislation
DTRs Disclosure, Guidance and Transparency Rules published
by the FCA
EA Enterprise Act 2002
EPC Energy Performance Certificate
EP Code Employment Practice Code issued by the Information
Commissioner
EU European Union
EUWA European Union (Withdrawal) Act 2018
FCA Financial Conduct Authority
Fraud Act Fraud Act 2006
FS Act Financial Services Act 2012
FSA Financial Services Authority (now the FCA)
FSMA Financial Services and Markets Act 2000

HMRC HM Revenue & Customs

IAS International Accounting Standards
IFRS International Financial Reporting Standards
ISM International Securities Market of the London Stock
Exchange
IP Intellectual Property
ISDX ICAP Securities & Derivatives Exchange
IT Information Technology
LA Limitation Act 1980
MA Misrepresentation Act 1967
Merger Regulation Council Regulation (EC) No. 139/2004
NS&I Act The National Security and Investment Act
Panel Panel on Takeovers and Mergers
PRA Prudential Regulation Authority
PSM Professional Securities Market of the London Stock
Exchange
Secretary of State Secretary of State for Business, Energy and Industrial
Strategy
SETS Stock Exchange Electronic Trading Service
SSE Substantial Shareholding Exemption
London Stock London Stock Exchange plc
Exchange
Takeover Directive Directive of the European Parliament and of the Council
on takeover bids (2004/25/EC)
TCGA Taxation of Chargeable Gains Act 1992
TFEU Treaty on the Functioning of the European Union
(2012/C 326/01)
Third Parties Act Contracts (Rights of Third Parties) Act 1999

TUPE Regulations Transfer of Undertakings (Protection of Employment)

or TUPE Regulations 2006
UK United Kingdom
UK GDPR General Data Protection Regulation (EU) 2016/679 as it
forms part of UK domestic law by virtue of EUWA and as
amended from time to time
UK IAS UK-Adopted International Accounting Standards
UK MAR Market Abuse Regulation (EU) No. 596/2014, as it forms
part of UK domestic law by virtue of EUWA and as
amended from time to time
UK MiFIR Regulation (EU) No. 600/2014 as it forms part of UK
domestic law by virtue of EUWA and as amended from
time to time
UK Prospectus Regulation (EU) 2017/1129 as it forms part of UK law by
Regulation virtue of EUWA and as amended from time to time
VAT Value Added Tax
[01] On 23 June 2016 the United Kingdom (UK) held a referendum to decide on
its membership of the European Union (EU) and voted to leave the EU. The UK
formally left the EU on 31 January 2020 and entered into a transition period
(known as the ‘implementation period’) that ended on 31 December 2020, during
which, broadly speaking, EU law continued to apply to the UK. Since the end of the
implementation period, EU law no longer applies in the UK, EU regulations are
no longer directly applicable in the UK and the UK no longer has an obligation to
implement EU Directives.1
[02] Under the European Union (Withdrawal) Act 2018 (EUWA), upon expiry of
the implementation period the then existing body of EU law insofar as it applied to
the UK immediately before the end of the implementation period was ‘on-shored’
into UK domestic law to minimize any legal uncertainty and to avoid legal vacu-
ums, creating a body of law within UK domestic law called ‘retained EU law’.
1 Subject to the Protocol on Ireland/Northern Ireland.

2 PRIVATE ACQUISITIONS
2.1 Overview
2.1.1 Introduction
[03] This section, dealing with private acquisitions, considers the legal structure of
the acquisition of shares in private companies incorporated in England and Wales
or of their assets. It provides an overview of what a private acquisition involves,
aiming to identify the key legal issues that usually arise during the course of a typi-
cal transaction.
[04] For those embarking on an acquisition for the first time, it is a summary of
what to expect. For those who have more acquisition experience, it deals with
recent trends, perhaps most notably the influence of private equity on acquisitions,
which has contributed to the popularity of sales by limited auction or tender pro-
cess and the particular legal points posed as a result. It covers matters of concern to
both purchasers and sellers and attempts to put all legal issues into their commer-
cial context.
[05] Before launching into the detail, we should begin with a basic outline of what
an acquisition involves. The following is a very simplified cascade of events:
–
striking the basic deal (and sometimes recording it in heads of agreement);
–
information gathering and planning;
–
drafting the principal documentation;
–
negotiating the principal documentation;
–
exchanging the acquisition agreement (often referred to as ‘signing’);
–
if the acquisition is conditional, dealing with the conditions (e.g., seeking
shareholder approval or various merger, regulatory, or industry consents);
– completing (often referred to as ‘closing’) immediately after exchange, if
there are no conditions, or, if there are, after those conditions have been sat-
isfied; and
– dealing with post-completion matters.
[06] Figure 1 shows the basic stages of an acquisition.

Figure 1
Purchaser carries Seller gives
out due diligence purchaser its Seller makes further
exercise disclosure letter disclosures?
Information gathering
and planning/data Dealing with any C Post-completion
room access E conditions O matters
X M
C P
H L
Drafting the A E
documentation N T
G I Purchaser uses
E O information
Negotiating the N gathered to run its
documentation new business
Seller gives purchaser Seller repeats

warranties warranties?
2.1.2 The Type of Acquisition: Shares or Assets?

[07] Before embarking on the acquisition, it is necessary to consider whether it
should be a shares or assets deal. The advantages and disadvantages of the pur-
chaser acquiring the assets of the target company (together comprising the target’s
business) or the shares in the target company are as follows.
[08] In the case of an assets acquisition, the only assets (or, indeed, liabilities)
acquired by the purchaser are usually those it expressly agrees to take on board
(with the notable exception of any employees automatically transferred by the
Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE
Regulations or TUPE)).2 On a share acquisition, all assets, liabilities, and obliga-
tions are acquired by the purchaser, including those it does not want and those of
which it may be unaware.
[09] A share purchase is conceptually simpler in pure legal terms. The only asset
being transferred is the shares in the target company. In contrast, an asset purchase
is more complex, in that each of the separate assets constituting the target business
needs to be separately transferred to the purchaser. This may require more con-
sents and approvals. For example, the transfer of contracts with suppliers and cus-
tomers will invariably require the consent of those third parties. It should, however,
be borne in mind that set against this is that it is common for such contracts to con-
tain ‘change of control’ clauses, which means that the consent of the relevant third
party often needs to be sought even in the context of a share deal.
2 See the employment section of Specialist Areas, below.

[10] Although, in theory at least, an acquisition of shares as opposed to assets is

more straightforward because it involves the transfer of only one asset (i.e., the
shares), share deals can in fact be more complex, in particular where there is more
than one seller. There may be a large number of shareholders with whom a pur-
chaser needs to negotiate in the context of a share sale. Often these shareholders
have conflicting interests and may be separately represented, which can make
negotiation of the documentation protracted. In the context of an asset acquisition,
the purchaser usually needs to negotiate with only one party, the selling company.
[11] The prohibition on providing financial assistance for the acquisition of a com-
pany’s own shares, Part 7 of the Financial Services Act 2012 (FS Act) (regarding mis-
leading statements and impressions) and section 21 of the Financial Services and
Markets Act 2000 (FSMA) (which places restrictions on promoting the sale of
shares) are irrelevant in the context of asset sales (unless the assets to be purchased
include shares).3
[12] Although both asset and share sales can involve lengthy warranty negotiation,
generally speaking, a purchaser’s expectation as to the number and scope of war-
ranties is less in the context of an asset sale and the seller will be more reluctant to
give fulsome warranties. On a share sale, the purchaser will want and expect com-
prehensive warranty cover in view of the fact that it will be acquiring all assets,
liabilities and obligations.
[13] Sellers often prefer to proceed by way of share sales rather than asset sales.
This is for two principal reasons:
(1) Asset sales can involve potential double taxation charges, particularly
when the seller is a company that has individual shareholders. Chargeable
gains (or other taxable profits) arise in the company’s hands when it sells
the assets to the purchaser and shareholders may then be taxed on the sale
proceeds when these are distributed to them by the company. A disposal of
shares, however, puts the sale proceeds directly into the hands of the sell-
ing shareholders. Furthermore, sale proceeds arising on the disposal of
shares by a company may be exempt from tax as a result of the substantial
shareholding exemption (SSE).
(2) Sellers often want a ‘clean break’. The break is cleaner (but not altogether
clean, because there is always the potential risk of warranty, covenant or
indemnity claims) in the context of share sales. With asset sales, the seller is
more likely to be left with liabilities it must sort out and with assets of little
or no value (e.g., obsolete stock). Liabilities can be ongoing rather than
just historic, particularly in the context of contracts that have been
assigned rather than novated.
[14] In contrast, purchasers often prefer to proceed by way of asset purchases

rather than share purchases. This is also for two principal reasons:
3 The statutory provisions noted in this paragraph are considered more fully below.

(1) In asset sales, purchasers may be more selective about what they acquire.
They can ‘cherry pick’ rather than take a company complete with all its
liabilities. Liabilities can generally be left behind.
(2) From a tax point of view, an asset purchase can be seen as preferable to a
share sale from the purchaser’s perspective, as the purchaser would not
inherit the target company’s tax history. This has, broadly, two advantages,
the first of which has already been alluded to in the first bullet: historic tax
liabilities are generally left behind. Second, the purchaser would not gen-
erally inherit the seller’s tax base cost in the acquired assets. This means
that the purchaser would, for example, be able to claim any applicable
writing down allowances (e.g., capital allowances in respect of plant and
machinery) on the basis of the price it has paid, rather than on the basis of
the tax written-down value at which the relevant assets were held by the
seller. This advantage may, however, be limited given legal and practical
constraints on how the purchase price in an asset sale can be allocated.
Moreover, transaction taxes payable by the purchaser in respect of an asset
sale may exceed those due on a share sale.4
Hive-downs and hive-ups
[15] The ‘hive-down’ and ‘hive-up’ represent a hybrid of share/asset deals. On a

hive-down, the seller transfers those assets which the purchaser wishes to acquire
and liabilities which the purchaser is prepared to assume to a new company (usually
a newly formed subsidiary) and then sells the shares in that company to the pur-
chaser. On a hive-up, an existing company that already owns the assets that the
purchaser wishes to acquire transfers to its parent (or a sister) company those assets
and liabilities that the purchaser does not want. Once the existing company has
been cleaned up in this way, it would be sold to the purchaser.
[16] It is easier to ensure that unwanted liabilities stay behind on a hive-down than
on a hive-up. On a hive-up, it is unlikely that all unwanted liabilities could be trans-
ferred out of the relevant company. This applies in particular in respect of historic
tax liabilities.
[17] Hive-down and hive-up structures should always be vetted by tax specialists.
For example, where it is intended that, as part of a hive-down unused trading losses
would be transferred to the new company, a number of anti-avoidance provisions
that could restrict the transfer of, or access to, those losses would need to be con-
sidered. The tax treatment of any asset transfers to the new company should also be
considered, given potential knock-on effects on its sale to the purchaser. Following
a tax neutral transfer of assets from the seller to the new company, de-grouping
charges could be triggered when the new company is sold to the purchaser. A hive-
up could be considered as a potential alternative structure. De-grouping charges
tend to be triggered where the transferee leaves the group at a time when it contin-
ues to hold the transferred assets and, on a hive-up, the company sold would be the
4 See the tax section of Specialist Areas, below.

transferor (and not the transferee) in respect of any assets that changed hands
within the seller group before the third-party sale.
2.1.3 Summary of Legislation and the Regulatory Framework5
Distinguishing Between Companies
[18] A company may be unlimited, limited by guarantee or limited by shares (the

vast majority are limited by shares). In addition, it may be public or private.
[19] A public company must be designated as such (usually by the abbreviation
‘plc’) and hold a certificate from the Registrar of Companies demonstrating that it
meets certain statutory requirements. The most important of these is that the com-
pany has a minimum authorized share capital6 and that the shares have been paid
up to the extent of 25 per cent. Any company that does not meet these require-
ments is automatically a private company. A private company is not required to
limit the number of its members nor to restrict the right to transfer its shares, but is
prohibited by law from offering its shares to the public.
[20] The second important distinction is between those companies whose shares
are actively marketed and those in whose shares there is no market. This distinction
is not a legal one, but it is nevertheless vital for an understanding of the relevant
regulatory framework.
Statutory Control over Corporate Acquisitions
[21] Although there exists a vast body of company law (primarily embodied in the
Companies Act 2006 (CA06)) regulating the constitution and operation of compa-
nies as well as the manner in which they are laid to rest, there are very few legal
sanctions to control the manner in which they are bought, sold, and dismembered.7
To the extent that private acquisitions of companies or businesses are made for
straightforward cash consideration, the law leaves the seller and purchaser free to
reach whatever bargains they choose.
[22] The current financial regulation regime in the UK was brought into effect by
the FS Act, under which three bodies were created: the Financial Conduct Author-
ity (FCA), the Prudential Regulation Authority (PRA) and the Financial Policy
Committee. The FCA has responsibility for relevant functions relating to corporate
acquisitions and mergers.
5 The legislation and regulation of particular relevance in the context of acquisitions of public compa-
nies is considered more fully in the section dealing with acquisitions of public companies, below.
6 Section 763 Companies Act 2006 (CA06) prescribes an authorized minimum for a public company’s
nominal share capital of GBP50 000 or its equivalent in Euros, which, as prescribed by the Compa-
nies (Authorized Minimum) Regulations 2009, is EUR57 100.
7 Although regard must be had to, for example, ‘change of control’ provisions of the kind mentioned
in para. 36 below and the provisions dealing with financial assistance (Part 18, Ch. 2 CA06), which
may have a bearing on the transaction contemplated by the parties. Financial assistance is consid-
ered in Consideration and the section dealing with acquisitions of public companies, below.

[23] A public company may be a ‘listed’ company and have its shares traded on the
London Stock Exchange plc (London Stock Exchange).8 The Listing Rules, Regu-
lation (EU) 2017/1129 as it forms part of UK law by virtue of EUWA (UK Prospec-
tus Regulation), and Disclosure Guidance and Transparency Rules (DTRs),9 all of
which are the responsibility of the FCA, govern, inter alia, admission to listing and
the continuing obligations of listed companies and that must be observed in any
private company acquisition when either the acquiring or the target company is a
listed company or a member of a group in which one company in the group is a
listed company.
[24] In addition, the City Code on Takeovers and Mergers (City Code)10 applies,
broadly speaking, when the target company has its registered office in the UK11
and any of its securities are admitted to trading on a UK regulated market or a UK
multilateral trading facility. The City Code also applies to public and private target
companies that do not have securities traded on a UK regulated market or a UK
multilateral trading facility but are considered by the Panel on Takeovers and
Mergers ( Panel) to have their place of central management and control in the UK.
The City Code does not apply if the target company is an open-ended investment
company. As discussed below,12 the City Code only applies to certain types of pri-
vate company, chiefly when the equity share capital of the target company has, at
any time during the ten years prior to the offer, been to some degree publicly held.
The status or residence of the offeror is immaterial. The City Code also applies to
certain asset purchases.
[25] The rules of the City Code are designed to ensure that all the shareholders of
a company which is the subject of a takeover offer are treated equally, that such
shareholders are given sufficient information to decide whether or not to accept an
offer for their shares and that improper tactics are not adopted to frustrate such an
offer.
[26] The implementation of the Directive of the European Parliament and of the
Council on takeover bids (2004/25/EC) (Takeover Directive) in the UK by Part 28 of
the CA06 increased the extent to which the regulation of takeovers has a statutory
basis by putting the Panel on a statutory footing.13 A breach of certain rules in the
City Code may be a criminal offence under the CA06.14 The implementation of the
Takeover Directive in the CA06 also made other changes to the regulation of take-
overs, including the creation of an optional regime for companies to override
defensive devices that may be put in place prior to a bid being launched and modi-
fications to the provisions dealing with residual minority shareholders following a
8 A public company may also have its shares traded on other exchanges such as the Alternative Invest-
ment Market of the London Stock Exchange (AIM) or the ICAP Securities & Derivatives Exchange
(ISDX) – both AIM and ISDX are ‘multilateral trading facilities’ for the purposes of the City Code.
9 These rules can be found in the FCA Handbook, which can be located at www.fca.org.uk/handbook.
10 Considered further in the section dealing with acquisitions of public companies, below.
11 The City Code also extends to the Channel Islands and the Isle of Man.
12 See the section dealing with acquisitions of public companies, below, at para. [605].
13 See s. 942 CA06.
14 See the section dealing with acquisitions of public companies, below, at para. [605].

successful takeover bid (known as ‘squeeze-out’ and ‘sell-out’ rules).15 Following the
end of the implementation period, the Takeovers (Amendment) (EU Exit) Regula-
tions made changes to Part 28 to reflect Britain’s withdrawal from the EU and
remove references to the Takeover Directive.
[27] The UK competition authorities and the Secretary of State for Business,
Energy and Industrial Strategy exercise through the Enterprise Act 2002 (EA) an
effective right of veto over certain UK acquisitions that are substantial in terms of
size or market share, or raise public interest considerations (such as national secu-
rity concerns). The Competition and Markets Authority (CMA) may refer the trans-
action for detailed investigation if certain tests are satisfied.16
[28] Part 7 of the FS Act sets out three offences relating to misleading statements,
misleading impressions and misleading statements and impressions in relation to
benchmarks, with the first two offences being most relevant in the context of corpo-
rate acquisitions and mergers. Under section 89 (Misleading statements) of the FS
Act, any person who makes a statement knowing that it is false or misleading in a
material respect (or being reckless as to whether it is), or who dishonestly conceals
any material facts, is guilty of an offence if this is done to induce another person to
enter or offer to enter into, or indeed to refrain from entering or offering to enter
into, a relevant agreement,17 or to exercise, or refrain from exercising, any rights
conferred by an investment. Under section 90 (Misleading impressions) of the FS
Act, any person who does any act or engages in a course of conduct that creates a
false or misleading impression as to the market in, or the price or value of, any
investments is guilty of an offence if the person does so for the purpose of inducing
another to acquire or dispose of, or take certain other actions in relation to, those
investments. Under section 382 FSMA, a person who has been knowingly con-
cerned18 in the contravention of sections 89 or 90 of the FS Act may have a restitu-
tion order made against him or her, with the consequence that advisors could also
be held liable in certain circumstances for a client’s breach of these provisions.
[29] In addition, under the Market Abuse Regulation (EU) No. 596/2014, as it
forms part of UK domestic law by virtue of EUWA (UK MAR), the FCA may impose
penalties on persons who have engaged in market abuse.19 Market abuse is a con-
cept that encompasses unlawful behaviour in the financial markets. This includes
behaviour such as insider dealing, unlawful disclosure of inside information and
market manipulation.
15 Chapter 3 of Part 28 CA06.

16 The EA is considered in greater detail below. See the competition section of Specialist Areas.
17 The term ‘relevant agreement’ includes a share sale agreement but does not encompass a business or
asset purchase agreement. However, note that the criminal law of fraud and the tort of deceit may
nevertheless be relevant.
18 The Court of Appeal in Securities and Investments Board v. PantellSA and Others (No. 2) [1993] 1 All ER
134 CA, a case concerning equivalent provisions under s. 47 (misleading statements and practices)
and s. 61 (injunctions and restitution orders) of the Financial Services Act 1986 (the FS Act 1986),
held that a solicitor can be liable as a person ‘knowingly concerned’ in his client’s contravention of
the FS Act 1986 even though none of the payments made by the duped investors were made to the
solicitor.
19 Considered further in the section dealing with acquisitions of public companies, below.
10

[30] Section 21 of FSMA provides that no person other than an authorized person
may, in the course of business, communicate an invitation or inducement to engage
in an investment activity unless the content of the communication is approved by
an authorized person or it falls within a relevant exemption.20 Section 21 of FSMA
will not normally be relevant to an asset sale.
[31] If the target of the proposed acquisition or one of its subsidiaries is an autho-
rized person under FSMA, the acquisition of shares (or other forms of influence)
may trigger prior consent or post-notification requirements – so-called change of
control provisions. Completion of certain acquisitions when prior regulatory con-
sent is required may be a criminal offence and may leave the transaction vulnerable
to being unwound by a court. Similar requirements will apply to other regulated
areas – for example, airlines and broadcasting.
The European Dimension
[32] Much of the existing European legislation also has a substantial influence on
the manner in which acquisitions are conducted. The principal example is Council
Regulation (EC) No. 139/2004 (Merger Regulation), which provides a mechanism
for control of mergers and acquisitions with an ‘EU dimension’.21
[33] Further, companies have had to take account of a whole gamut of social and
employment-related directives designed to harmonize and improve employee
rights within the European Community, which prior to Brexit were implemented
into UK law, for example, the TUPE Regulations or, following the end of the Brexit
implementation period, form part of retained EU law. The TUPE Regulations are
designed to protect employees on a transfer of the business that employs them (but
note that they offer no protection on a share acquisition).
3 PRELIMINARIES
3.1 Heads of Agreement, Confidentiality Undertakings,

and Exclusivity Agreements
3.1.1 Heads of Agreement
[34] Heads of agreement (also known as a letter of intent), drawn up between the
parties, describe the intentions of the parties and the course of action proposed.
They are not an essential part of an acquisition (and, indeed, they appear to have
20 Section 21 of FSMA and the exceptions to it are discussed in more detail in Auction Sales, below,
under ‘Legal Issues – the Information Memorandum’.
21 The Merger Regulation is considered in greater detail below; see the competition section of Special-
ist Areas.
11

declined in popularity in recent years, perhaps due to the increase in the number
of auction sales) but may be appropriate in some cases.
[35] The parties may want heads of agreement to provide a level of certainty. One
of their benefits is that they provide a summary of the business transaction between
the parties. Further, they comprise a record of the main points on which the parties
have reached agreement; they may avoid misunderstandings and record key con-
cerns of the parties. Heads of agreement are usually non-binding and so create a
moral climate; sellers or purchasers may be discouraged from seeking to renegoti-
ate later what they thought had been agreed.
[36] Heads of agreement are intended to identify the principal general areas of
commercial understanding between a purchaser and a seller. They are a convenient
site for a confidentiality undertaking and an exclusivity agreement. It is often the
case that the confidentiality undertaking and exclusivity agreement, in addition to
provisions relating to the payment of the other party’s costs, are specifically
expressed to be legally binding.
[37] Negotiating heads of agreement should not be a dress rehearsal for negotia-
tion of the full-scale sale and purchase agreement. Heads of agreement should
tackle the basic points, describing who is selling, who is buying, what is being sold
and for how much. The main headings typically covered by heads of agreement are
set out in Table 1.
Table 1 Heads of Agreement: Main Points
Subject of – shares/assets to be bought or sold

intended sale and – specify any excluded items (assets or liabilities)
purchase – freedom from encumbrances
Consideration – price, range of possible values or price basis
– form, for example, cash, shares, loan notes, etc.
– timing of payment (including any retention fund)
Timetable – exchange of contracts
– completion
– (when relevant) arrangements between exchange and
completion
Conditions prece- – due diligence
dent – any financing required to be in place
– board approvals
– shareholders’ approvals
– regulatory consents
– tax clearances
– specific contracts or consents
12

Warranties and – general approach to be adopted

indemnities and – non-competition
restrictive cov- – non-solicitation
enants – confidentiality
Employee mat- – service contracts with key executives
ters and pensions – liability in respect of pension arrangements
– continuity of employment
Exclusivity of – time period involved
negotiation confi-
dentiality
Costs – if one party is to bear the other party’s costs should the
transaction be abandoned, this may be dealt with in the
letter
No legal effect – heads of agreement are often expressed to be subject to
contract, and there should be a statement that the par-
ties do not intend the letter to be legally binding, save
for the confidentiality, exclusivity and costs provisions, if
applicable.22
3.1.2 Confidentiality Undertakings
[38] It is desirable, before making any detailed evaluation of the target company
or business, that the acquiring company should have available to it as much com-
mercial and financial information about the target as possible. Due to the fact that
detailed information can only come from the target company itself, an initial
approach will be necessary, whether directly or through intermediaries, to the own-
ers or (where appropriate) to the target company’s board.
[39] The seller will normally be prepared to divulge a limited amount of commer-
cial and financial intelligence subject to appropriate undertakings concerning con-
fidentiality and the use to which the relevant information is put. This means that
before releasing certain information to the purchaser or allowing the accountants
access to the books, sellers will usually require the purchaser to sign a confidential-
ity undertaking.
22 There is an argument that labelling the heads of agreement ‘subject to contract’ when it is intended
that certain provisions, for example confidentiality undertakings, are to be legally binding is inap-
propriate. The argument is that when the words ‘subject to contract’ operate so as to avoid the cre-
ation of binding obligations, they do so by making the heads of agreement conditional on formal
documentation being entered into. On a narrow construction, this would make the provisions that
are intended to be legally binding, and the paragraph dealing with their legal status, conditional on
the acquisition agreement being exchanged. It is preferable therefore to include a separate section
in the heads of agreement setting out which provisions are legally binding and which are not.
13

[40] Confidentiality undertakings on the part of the purchaser may be contained

in a formal agreement between the seller and purchaser or in a letter from the
seller of the target company, group, or business addressed to the prospective pur-
chaser.
[41] When a corporate seller is proposing to sell a subsidiary, confidentiality
undertakings used to be taken by the seller and as trustee for the subsidiary. If the
relevant subsidiary was sold and subsequently wished to enforce these undertak-
ings, it had to be done through the medium of its former parent. This is no longer
necessary because the Contracts (Rights of Third Parties) Act 1999 (Third Parties
Act) enables rights to be conferred directly on the subsidiary.
[42] Confidentiality agreements tend to follow a consistent pattern and will usually
include as a minimum the main provisions as set out in Table 2.
Table 2 Confidentiality Agreement: Key Provisions
Definition of ‘confiden- – information which is included

tial information’ – information which is excluded (e.g., information
already known to recipient, or in the public
domain, or which subsequently enters the public
domain)
Principal obligations – not to disclose confidential information
affecting recipient – not to use confidential information except for
evaluation
– compliance with data protection law, data breach
notification obligations and restrictions on use
and sharing of any personal data
Exceptions – disclosure to employees and advisers permitted
on a ‘need to know’ basis
– disclosure permitted, for example, as required by
law
Return or destruction – no warranty (as to accuracy or completeness of
of papers should nego- information)
tiations fail other terms – binding force on employees, advisers, etc.
– third-party provisions in favour of the target com-
pany or the seller’s group
– choice of law and jurisdiction
[43] The seller may wish to restrict access to the confidential information to a spe-
cific number of people. If the identity of such persons is certain, a schedule may be
appended to the confidentiality agreement or letter giving the names, addresses,
14

and occupations of such persons.23 In addition, the confidentiality undertaking

will usually restrict the use of the confidential information to the contemplated
transaction. Care needs to be taken when defining the contemplated transaction
because if the transaction changes, the parties may find that they are using the con-
fidential information in breach of the terms of the confidentiality undertaking.
This was the situation in Vercoe v. Rutland Fund Management24 where the High Court
held that a venture capital company had breached the terms of an undertaking by
using confidential proposals about a management buy-in opportunity to proceed
with a different transaction without involving the parties who had proposed the
management buy-in opportunity.
3.1.3 Exclusivity Agreements
[44] A purchaser will be keen to ensure that undertakings concerning exclusivity

are included in the heads of agreement, or in their absence, any confidentiality
undertaking.
[45] When the sale does not take place by way of auction, the purchaser will want to
guard against the seller negotiating with another party while also negotiating with
the purchaser. The purchaser may therefore seek agreement from the seller that
negotiations will not be entered into with any other party and that no information
will be provided to any other party.
[46] It was decided by the House of Lords in Walford v. Miles,25 (followed in the case
of Pitt v. PHH Asset Management Limited),26 that an agreement purporting to oblige
parties to a transaction to negotiate exclusively with each other (a ‘lock-in’ agree-
ment) was unenforceable because it lacked certainty. However, an agreement for
good consideration whereby one party agreed not to negotiate with anyone except
the other party for a specified period (a ‘lock-out’ agreement) would be enforce-
able.
[47] In order to achieve exclusivity three ingredients are required. Good consider-
ation is necessary; this can be achieved by providing in the heads of agreement that
the purchaser agrees to carry out the due diligence (with all the resulting legal and
other costs) in consideration of the exclusivity provided by the seller. The exclusiv-
ity has to be specified; this means that it is necessary to make it clear and precise
that exclusivity is being granted. In addition, any ‘lock-out’ agreement must be for
a specified period of time.
[48] Radiant Shipping Co Limited v. Sea Containers Limited27 has established that it is
also possible to create an enforceable agreement for one party to recover costs
23 See the section above that considers the Third Parties Act as regards the enforcement of confidenti-
ality undertakings (by the subsidiary) in the context of a corporate seller proposing to sell a subsid-
iary.
24 [2010] EWHC 424 (Ch).
25 [1992] 2 AC 128.
26 [1994] 1 WLR 327.
27 [1995] CLC 976 (CA).
15

should the other withdraw from the negotiations. ‘Withdrawing from negotiations’
in this context does not extend to negotiations ceasing because the parties fail to
reach agreement and bring negotiations to an end. However, if one party, for rea-
sons extraneous to the negotiations, decides not to proceed (e.g., because it decides
it no longer wishes to sell the relevant company) while the other party is ready to
continue negotiating, then the first party would withdraw from negotiations.
3.1.4 Are Heads of Agreement Desirable?
[49] We noted earlier some of the benefits of heads of agreement. A further advan-
tage of having heads of agreement at the outset is that the purchaser can set out its
key concerns. For example, due diligence may not have been completed and the
purchaser may therefore wish to express everything to be subject to future due dili-
gence. Also, the board of the purchaser may not have approved the acquisition and,
again, it can make the heads of agreement subject to board approval.
[50] However, there are also disadvantages to having heads of agreement, and
especially having heads of agreement too early.
[51] One of the disadvantages is that there is bound to be some duplication
between the heads of agreement negotiations and the negotiations of the acquisi-
tion agreement. It is often the case that the parties are so keen to avoid ambiguity
that the heads of agreement become disproportionately long and detailed. This
question of double negotiation means that it is important to decide whether or not
it is better to go straight into a sale and purchase agreement negotiation. Related to
this is the time it usually takes to agree to the heads of agreement. If the parties are
working to a tight deadline, it may be quicker for them to agree on a confidentiality
undertaking with an exclusivity provision or ‘lock-out’.
[52] Another disadvantage is that a purchaser may not be ready to sign a heads of
agreement if it has not completed its due diligence. There may be insufficient
information available to the purchaser before it conducts due diligence to make
setting out key terms worthwhile. In some cases it will be necessary to agree to the
price and the terms of the transaction but to build into the heads of agreement a
number of caveats.
[53] A further difficulty with heads of agreement is ensuring, if this accords with
the wishes of the parties, that they are not legally binding. From the purchaser’s
perspective, and quite often for the seller also, it is absolutely imperative that they
do not constitute a legally binding document. Unless clearly defined to the con-
trary, a court may take the view that the heads were intended to be legally binding,
even though they were going to be fleshed out further in an acquisition agreement.
[54] However, even if the heads of agreement are made non-legally binding, there
is a risk that what will necessarily be a summarized document, in comparison with a
full sale and purchase agreement, will give rise to certain unforeseen interpreta-
tions and expectations, and consequently damaging disputes and arguments over
breaches of good faith. This can sour a relationship much more readily than if the
parties proceed directly to negotiate the acquisition agreement itself. In addition,
16

certain overseas jurisdictions recognize a general duty to negotiate in good faith.

Breaking off negotiations with a foreign party at a late stage may breach such a duty
and result in liability for the terminating party.
[55] Finally, it is also worth noting a potential impact of signing heads of agree-
ment on taxation matters, in particular, the transfer of tax losses between the target
company and the seller’s retained group. Section 154 of the Corporation Tax Act
2010 (CTA10) would prevent a target company from surrendering losses to, or
receiving losses from, a company within the seller’s retained group in any account-
ing period where arrangements are in existence by virtue of which, at some time
during or after the expiry of that accounting period, the target company could
cease to be a member of the seller’s group. Depending on the circumstances, it
should be considered whether signing the heads of agreement could be regarded as
constituting arrangements for these purposes. In addition, it should be considered
whether signing heads of agreement could be regarded as prejudicial to the ability
to claim exemption from stamp duty on any pre-sale intra-group reorganization.
3.2 Due Diligence

3.2.1 Introduction
[56] Due diligence means many things to many people. Although some attribute
its origins to United States Securities Law, this does not seem to use the words ‘due
diligence’ at all. It is a term that has probably been imported across the Atlantic
and is, in essence, about obtaining information on a company or a business by a
variety of people for a variety of different reasons. Lawyers, bankers, and business
people often talk about ‘doing due diligence’ as if it were a defined term that quite
clearly meant the same thing to everyone. In fact, it not only means many things to
many people but different things in different circumstances.
[57] In the context of a private acquisition, due diligence is an expression that
describes the search for information carried out by a purchaser as soon as possible
after the start of negotiations for the purchase. It is probably in this context that the
due diligence exercise is the broadest and most time-consuming. It involves the
purchaser carrying out its own investigation into the target company or group and
may involve attending a data room, reading files, inspecting premises, making
enquiries of senior management and conducting searches.
[58] Over the last fifteen years, the scope of due diligence exercises has become
wider and has involved a greater number of professional advisers. A purchaser may
limit investigation to purely business matters, but is more likely to involve accoun-
tants, lawyers, actuaries, tax advisers and other specialist advisers to review wider
matters. In many cases, more time is spent doing due diligence than negotiating
the acquisition agreement itself. More recently, clients and their advisers are look-
ing to artificial intelligence platforms to reduce the amount of time and resources
used in the due diligence process. While artificial intelligence-led due diligence is
17

still in its infancy, it has begun to be accepted and is expected to become ever more
prevalent in coming years.
[59] Although traditionally purchaser-led, as auction sales and data rooms become
more fashionable, due diligence is increasingly seller initiated.28
3.2.2 Caveat Emptor and the Limitations of Contractual Protection
[60] Generally speaking, the seller is under no duty to reveal any defects in the tar-
get company or business to the purchaser. In English law, the principle underlying
the sale of shares or a business is caveat emptor, or ‘let the buyer beware’.
[61] This principle of ‘let the buyer beware’ explains why purchasers seek contrac-
tual protection, notably in the form of warranties, in the acquisition agreement.29
Although warranties provide a contractual post-completion price adjustment
mechanism, they do not protect the purchaser from doing a bad deal. Most pur-
chasers would rather incur the costs inherent in carrying out investigations as part
of the due diligence exercise than risk making a bad bargain.
[62] The due diligence exercise gathers the information necessary to verify the
price the purchaser has agreed to pay, to draft the acquisition agreement and to
plan the running of the business after completion of the acquisition.
[63] Due diligence should not be viewed as a substitute for contractual protection,
but it can help the seller and purchaser decide exactly what contractual protection
is required.
3.2.3 The Importance of Due Diligence
[64] Due diligence is not without its drawbacks. The process can be expensive. In
addition, due diligence exercises are time-consuming and may involve a large
number of key personnel, thus distracting them from their day-to-day roles. Fur-
ther, the knowledge the exercise gives the purchaser can further limit its ability to
pursue a successful warranty claim, depending on the wording of the agreement.30
[65] However, the due diligence exercise has become an increasingly important
element of any acquisition, enabling the purchaser to verify the deal struck. While
due diligence is not an alternative to contractual protection for the purchaser, one
of its advantages is that it puts the purchaser on notice of potential problems. If the
purchaser discovers something untoward, it has various options.
[66] At worst, the purchaser could decide to withdraw from the deal altogether.
Alternatively, the purchaser could use the information gleaned to reduce the pur-
chase price and renegotiate the terms of the acquisition agreement, most probably
28 See Auction Sales, below.

29 Warranties are considered in Contractual Protection, below.
30 Considered further below in the context of the purchaser’s knowledge and due diligence.
18

requesting an indemnity from the seller. The information that the purchaser col-
lects during the due diligence exercise provides it with an important negotiating
tool.
[67] Further, the due diligence exercise, and parting with due diligence informa-
tion, aids the seller in limiting its potential liability to the purchaser. It also pro-
vides a means by which the information needed to prepare the seller’s disclosure
letter can be drawn together.
3.2.4 The Due Diligence Questionnaire
[68] Traditionally, the purchaser’s solicitors will draw up the due diligence ques-
tionnaire, which initiates the due diligence process. If, however, the sale is by way of
a tender or auction process,31 the seller will initiate the due diligence process.
[69] The traditional due diligence questionnaire sets out the areas to be addressed
and provides a list of questions to be answered by the seller. The due diligence
questionnaire should begin by defining any materiality levels which have been
agreed upon between the parties in respect of any particular set of questions. This
should mean that the parties focus on key issues and will save both time and
expense. For example, with regard to the section dealing with contracts, materiality
may be addressed by reference to the value of the contracts or their duration.
[70] Before sending the due diligence questionnaire to the seller’s solicitors, the
purchaser’s personnel should review the questions to ensure that they are relevant
to the proposed acquisition and to add any further questions which may be specific
to the business in question. Areas commonly addressed by the due diligence ques-
tionnaire are set out in Table 3.
19

Table 3 Due Diligence Questionnaire: Areas Commonly Addressed
(1) corporate structure

(2) accounts
(3) contracts and commitments
(4) trading arrangements
(5) suppliers
(6) licences
(7) bank accounts and borrowing
(8) compliance and litigation
(9) tangible assets and property
(10) intellectual property
(11) information technology
(12) data protection
(13) competition
(14) insurance
(15) employees
(16) pensions
(17) environment
(18) taxation
(19) business-specific issues
[71] It is necessary for both parties to establish clear lines of internal communica-
tion. The seller’s team and its advisers need to know who is responsible for answer-
ing which questions. The purchaser’s team and its advisers need to be clear as to
who is analysing the answers and copy documents received and to whom they are
reporting their findings. This is particularly important because, although there
may be some overlap, the personnel carrying out the due diligence are unlikely to
be the same people as those who are negotiating the terms of the acquisition.
[72] Purchasers often create a pro forma template of commercial considerations to
be considered when, for example, its personnel review a contract. The purchaser’s
legal advisers will often have a similar template dealing with purely legal consider-
ations.
[73] When collating due diligence information in order to send it to the purchaser,
the seller’s team needs to be particularly aware of three potential difficulties that
are often overlooked – these potential difficulties relate to third-party confidential-
ity issues, legal privilege and data protection.32
32 See the discussion of data protection beginning on para. [448].
20

3.2.5 Third-Party Confidentiality
[74] Before any agreement between the business to be sold and a third party is dis-
closed, it should be checked for obligations to keep its existence or contents confi-
dential. When such confidentiality obligations exist, the following are examples of
matters to consider:
– whether an approach to the third party should be made (including an assess-
ment of the impact this would have on the timing and confidentiality of the
sale process);
– whether it is possible to make an adequate limited disclosure which does not
breach the obligation (a possibility may be to blank out any confidential fea-
tures);
– whether it is possible to give some satisfactory generic disclosure about a class
of contracts that does not breach any confidentiality provisions; and
– whether either the seller or the potential purchaser is willing to bear the risk
of the consequences of a breach of the obligations. However, in this context,
the Fraud Act 2006 (Fraud Act) would need to be considered.33 Section 3 of
the Fraud Act creates an offence of failing to disclose information where
there is a legal duty to disclose it, if the intention is to make a gain or cause
another to suffer a loss. When the relevant agreement imposes a legal duty
on the seller to notify the third party of any unauthorized use, copying or dis-
closure, a deliberate failure to so notify could be an offence under section 3 of
the Fraud Act.
3.2.6 Legal Privilege
[75] Where the seller or the target company is, or may become, involved in a dis-
pute with another party, any proposal to disclose potentially relevant documents to
potential purchasers should be considered carefully. These documents could be
privileged, meaning they do not have to be provided to an opponent, court or
regulator. Disclosure to potential purchasers could cause privilege to be lost, preju-
dicing the position of the seller or target in the dispute.
[76] The categories of privilege most relevant in this context are legal advice privi-
lege and litigation privilege. The former applies to confidential communications
passing between a lawyer and a client created for the purpose of seeking or giving
legal advice. The latter, which is broader in scope, applies to confidential commu-
nications between (a) a client or its lawyer and (b) a third party which are made for
the dominant purpose of conducting litigation that is on foot or in reasonable con-
templation. To the extent documents of either kind are already in existence, shar-
ing them with a third party – for example, a potential purchaser – may jeopardize
33 The Fraud Act was brought into force on 15 Jan. 2007. It repeals various deception offences, includ-
ing s. 15 of the Theft Act 1968. See further the section of Auction Sales, below, entitled ‘Legal Issues’.
21

their confidentiality, and a document which is not confidential cannot be privi-

leged.34
[77] The maintenance of confidentiality is accordingly vital. In City of Gotha v.
Sotheby’s35 and the first instance decision in USP Strategies plc v. London General
Holdings Ltd,36 the courts supported the view that, in limited circumstances, privi-
leged material can be shown to third parties without losing the privilege provided:
(i) there is evidence that the parties intended the material to be kept confidential;
and (ii) there was no intention by the party giving disclosure to waive privilege. An
agreement to this effect should be made in writing and should provide additional
safeguards for the seller, including a requirement on the potential purchaser to
resist, and give the seller immediate notice of any attempt by a third party to obtain
the privileged material.
[78] Even a closely controlled disclosure of privileged material carries with it a risk
that privilege will be lost. This risk must be balanced against the need to make such
disclosure as is necessary to enable a purchaser to assess the impact of the litigation
on the value of the business to be sold. To the extent consistent with this need, dis-
closure should be as limited as possible.
[79] As an alternative to the disclosure of documents, it may be possible to provide
sensitive information orally at a meeting between the two sides’ solicitors, with the
discussions at that meeting being deemed to be disclosed to the purchaser. The
seller may argue that no written record should be taken of the meeting, as this
record would still be outside the seller’s control, might not be privileged and there-
fore could potentially be disclosable in litigation (although the risk of such disclo-
sure would be less than if documents were passed directly to the purchaser).
3.2.7 Tracking Information
[80] The seller and its team will need to track the information given to the pur-
chaser and should endeavour to maintain an efficient indexing system. This will
enable the seller to ensure that the information is formally disclosed in the disclo-
sure letter and to rely on the fact that the information has been given to the pur-
chaser if any warranty claims arise. Further, the seller and its team should keep a
record of questions answered and copy documents sent to the purchaser.
[81] Similarly, the purchaser and its team need to keep track of information
received. It is highly probable that the initial due diligence questionnaire will be
followed by a list of supplemental queries. The purchaser should maintain a master
copy of all questions raised and copy documents received.
34 A report prepared by the seller’s solicitors for the purpose of informing potential purchasers about
a dispute is unlikely to be privileged: legal advice privilege will not apply because the potential pur-
chaser is not a client of the solicitor, and litigation privilege will not apply because the report was not
prepared for the purpose of the dispute.
35 [1998] 1 WLR 114 (CA).
36 [2004] EWHC 373 (Ch).
22

3.2.8 Data Rooms
[82] We noted earlier that although traditionally purchaser-led, with the purchas-
er’s solicitors originating the due diligence questionnaire, increasingly, sellers are
seeking to initiate the process by establishing data rooms.
[83] This is particularly relevant when a company or business is to be sold by way of
a tender or limited auction process.37 The seller will be dealing with a number of
bidders and so needs to take control of the due diligence process in order to avoid
duplicating its efforts in responding to different potential purchasers’ enquiries.
Further, the seller will want to keep control over the dissemination of its confiden-
tial information.
[84] The seller will, therefore, usually conduct its own internal due diligence inves-
tigation. It will gather and catalogue information in response to a due diligence
questionnaire prepared by its own solicitors. The seller’s personnel and advisers
will evaluate the results of this internal investigation and appropriate information
will be given to the shortlisted bidders.
[85] A purchaser visiting a data room will need to ensure that it understands how
the data made available in the data room has been collected. The purchaser needs
to understand the questions that have been asked (by the seller about the target)
and what materiality thresholds have been applied in gathering documents.
[86] It is possible to make available some or all of the content of a data room in
electronic form, either on CD-ROM or more usually on a secure website (a ‘virtual
data room’).38 Nowadays, the majority of data rooms take the form of virtual data
rooms.
3.2.9 The Purchaser’s Knowledge and Due Diligence
[87] The due diligence process gives the purchaser knowledge. A potential draw-
back is that this knowledge may affect the purchaser’s ability to bring a warranty
claim post-completion.
[88] The scope of the warranties will be limited by disclosures made in the disclo-
sure letter.39 If the purchaser has actual knowledge of something that is not then
disclosed in the disclosure letter, the position with regard to whether the purchaser
can bring a warranty claim remains unsettled.
[89] The acquisition agreement may attempt to deal with this problem by stating
that no information of which the purchaser has actual knowledge (other than the
disclosures in the disclosure letter) will preclude it from bringing, or will affect, any
warranty claim, or reduce any amount recoverable.

38 See Auction Sales, below, for further discussion of the potential benefits and drawbacks of providing
such information via electronic media.
39 Disclosures are considered in Contractual Protection, below.
23

[90] Following the First Instance and Court of Appeal decisions in Infiniteland Lim-
ited v. Artisan Contracting Limited,40 it would appear that it is possible to provide con-
tractually for the effect of knowledge on a purchaser’s claim for breach of warranty.
Thus, it is possible to provide that a purchaser can sue even if the purchaser knew
of the breach of warranty. However, if a purchaser knows about a particular fact and
is still prepared to pay the full price, there could be an implication that the relevant
information has been taken into account and no loss has been suffered (see Eurocopy
PLC v. Teesdale)41 and the courts could then reflect this in any damages awarded.
Purchasers should therefore not place too great a reliance on provisions that say
that their knowledge does not preclude the bringing of warranty claims in cases in
which they are aware of particular facts that would give rise to such claims. These
issues are better addressed through indemnification.
3.2.10 Seller’s Failure to Answer Enquiries
[91] If the seller deliberately fails to give information, for example, if the pur-
chaser has asked for all contracts with a change of control clause in them and the
seller deliberately omits to hand some of them over, the seller may be liable both in
an action for deceit and under Part 7 of the FS Act.42
[92] As we have discussed,43 the effect of section 89 (Misleading statements) of the
FS Act is that when, in the context of a share deal, a seller dishonestly conceals any
material facts, the seller is guilty of an offence if it does so for the purpose of induc-
ing, or is reckless as to whether it may induce, the purchaser to enter into the acqui-
sition agreement.
[93] Conviction under Part 7 of the FS Act can result in an unlimited fine and the
possibility of a maximum of seven years’ imprisonment.
[94] In addition, the criminal offences of fraud by failing to disclose information
or fraud by false representation may be committed under the Fraud Act.44
3.3 Contractual Protection

3.3.1 Warranties
Introduction
[95] Warranties are statements about the target company or business (given at
exchange and often repeated at completion if there is a gap between the two) that
give the purchaser the basis of a claim for damages if they prove to be incorrect and
40 [2004] EWHC 955 (Ch); [2006] 1 BCLC 632.

41 [1992] BCLC 1067.
42 Considered below in the context of acquisitions of public companies.
43 See the section that summarizes the legislation and the regulatory framework, above.
44 See the section of Auction Sales below entitled ‘Legal Issues’.
24

the purchaser suffers loss as a consequence. The purchaser’s claim for damages for
breach of warranty amounts, in effect, to a retrospective adjustment of the purchase
price.
[96] As noted above, in English law, the principle underlying the sale of shares or a
business is caveat emptor, or ‘let the buyer beware’. Generally, the seller is under no
duty to reveal defects in the target company or business to the purchaser. Most pur-
chasers seek contractual protection, most notably in the form of warranties, cover-
ing a wide range of aspects of the target business or company.
[97] Warranties have an additional advantage for the purchaser. They direct the
seller’s mind to potential liabilities and problem areas, and elicit qualifying caveats
from the seller about the target company.
[98] The warranties may be amended by qualification; the seller will often wish to
insert a qualification to the effect of ‘to the best of the seller’s knowledge and
belief ’. However, the purchaser will often argue that the seller’s state of mind is
irrelevant to the price being paid, the price having been calculated on the assump-
tion that certain facts are correct.45
[99] Alternatively, or in addition, qualifications will usually be collected together in
a disclosure letter.46 The seller would normally prefer to disclose problems to the
purchaser in advance of signing (in a detailed disclosure letter that is dated the
same date as the acquisition agreement) rather than be liable to the purchaser for
breach of warranty at a later date.
[100] The purchaser’s expectations as to the number and scope of the warranties
are usually fewer in the context of an asset acquisition. In the case of an asset acqui-
sition, the purchaser is not in such a vulnerable position in comparison with a share
acquisition because there is no automatic assumption of all the liabilities of the
business.
[101] In contrast, if the purchaser is acquiring shares from the seller, it will be
inheriting all the liabilities of the target company, regardless of its knowledge with
regard to this liability. In a share acquisition, the purchaser should expect the num-
ber of warranties to be greater, and the scope of those warranties to be broader,
than in the context of an asset purchase.
[102] Certain private equity institutions may refuse to give warranties relating to
the target company’s business other than as to their capacity to sell and their title to
the shares or other assets being sold, although there are increasing exceptions to
this trend, particularly where specific issues have been identified. A private equity
seller may succeed in obtaining the purchaser’s agreement to such limited warranty
45 This issue was highlighted in the case of Belfairs Management Limited v. Matthew Sutherland, Christie
Jane Sutherland, [2013] EWCA Civ 185, in which, on appeal, the court confirmed that a warranty
which did not contain such subjective qualifications could only be interpreted on an objective basis.
This case also provided an interesting example of the court’s willingness, in certain circumstances, to
import a commercially sensible construction on a warranty, notwithstanding the literal or natural
meaning of the words used.
46 Disclosures are considered more fully in the section that considers the disclosure exercise, below.
25

protection because of market precedent, the negotiating power of the seller or

restrictions in the seller’s constitution. In such cases, the purchaser may therefore
seek such warranties from the other sellers (typically the managers of the business
being sold; it is increasingly common for such management warranties to be given
on a nil-recourse basis, in conjunction with the obtaining of warranty and indem-
nity insurance). Private equity sellers will also typically refuse to agree to repetition
of warranties and will often request low caps on liability. In order to bridge the gap
between the levels of warranties offered by the sellers and those desired by the pur-
chaser, the purchaser may consider obtaining warranty and indemnity insurance.
While warranty and indemnity insurance has its roots in private equity transac-
tions, it has become increasingly common on a broad range of different types of
private M&A transactions. In recent years, purchasers have been able to negotiate
low excesses for such policies. However, insurance will generally not provide cover
for known liabilities and certain categories of risk may be uninsurable.
The Changing Roles of Warranties and Due Diligence
[103] Traditionally, it was the warranties, set out in a schedule to the acquisition
agreement, that flushed out information about the target business. The warranty
schedule, comprising a large number of specific statements about the target busi-
ness, was information seeking. One of its major roles was to identify areas of con-
cern to the purchaser. The seller then used the warranty schedule as a checklist for
giving information to the purchaser. The process of the seller (and its advisers)
checking the accuracy of the warranties and recording any inaccuracies in the sell-
er’s disclosure letter gave the purchaser the information necessary to evaluate the
deal made with the seller.
[104] As the due diligence exercise has become an increasingly important element
of any acquisition, the checklist function of the warranty schedule has become less
significant due to provision of sophisticated due diligence questionnaires and data
room access at the outset of the transaction.47
[105] The warranties also perform a risk allocation role. To the extent that warran-
ties are given and are not qualified by disclosure or the purchaser’s knowledge, the
seller is accepting liability. To the extent that they are not given, or are limited in
their scope by disclosure (or, possibly, the purchaser’s knowledge),48 the purchaser
is assuming the risk.
Repetition of Warranties
[106] If there are conditions that have to be satisfied by either the seller or the pur-
chaser before completion, there will be a delay between the signing of the agree-
ment and completion. If this is the case, the purchaser should seek protection
against the warranties being inaccurate or misleading up to or at completion.
47 See the discussion of due diligence questionnaires and data rooms in Due Diligence, above.
48 See the discussion of the Infiniteland and Eurocopy cases in Due Diligence, above.
26

[107] Repetition of the warranties (or, more accurately, deemed repetition) brings
the warranties ‘up to date’; otherwise, the warranties will represent the state of busi-
ness as at signing and not during the interval. The purchaser may want repetition
to be as frequent as possible, for example, on a daily basis (see below), which entitles
the purchaser to claim breach of warranty at specified intervals and not just at
completion. The purchaser will at least want repetition at completion that will
entitle it to claim breach caused by something arising in the interval at completion
and not when the event actually occurs or the purchaser discovers it.
[108] The seller will seek to avoid repetition, particularly if the purchaser has
asked for the interval before completion (perhaps because it needs to seek regula-
tory consents). The seller will be opposed to repeating warranties that may become
inaccurate without the seller being aware of this or being able to control what hap-
pens to the target. A lesser consideration is that the seller will not want to involve
the target and its management in detailed monitoring of the business during this
period.
[109] If the purchaser is in a position of strength and can insist on repetition of the
warranties the seller should:
– attempt to limit the incidents of repetition to immediately before completion
only;
– try to limit repetition to ‘key’ warranties; and
– be entitled to disclose against repeated warranties any events occurring in
the period between exchange and completion. The seller may argue that fol-
lowing disclosure, if, in the reasonable opinion of the purchaser, the breach is
material, the purchaser must make a choice: either it must terminate (possi-
bly with compensation for costs up to a specified amount) or it must com-
plete, foregoing any rights to damages for the breach.
Rolling Warranties
[110] The most stringent type of protection for a purchaser is repetition of the
warranties each day between exchange and completion. Such warranties are
termed ‘rolling’ or ‘evergreen’.
[111] If the seller agrees to give rolling warranties, the purchaser may have the
option of terminating the agreement in the gap between exchange and completion
if a significant breach of warranty occurs. This could be particularly important for
the purchaser if there is a very long gap between exchange and completion; the
purchaser might wish to ‘cut the losses’ before completion rather than wait until
completion.
[112] However, in reality, sellers very rarely agree to give rolling warranties. The
seller will assert that it is the state of affairs at completion that is important and the
purchaser should not have the option to terminate in the interim.
27

Boxing of Warranties
[113] The seller may attempt to reduce the scope of the warranties by ensuring
that no warranties are given by the seller in the general warranties section that
could inadvertently be considered to apply in respect of specific matters, such as
intellectual property (IP), environmental matters, information technology (IT),
pensions and employment, and tax. Such specific warranties are often ‘boxed’, so
that in respect of, for example, information technology, the seller gives only those
warranties expressly stated to be IT warranties.
[114] How far ‘boxing’ reduces the scope of the warranties depends on the degree
of overlap between the boxed and the other warranties. Boxing of tax warranties,
in particular, should be resisted by a purchaser, who will wish to maintain the full
protections offered by the general warranties in respect of tax matters.
Remedies for Breach of Warranty
[115] If a warranty is inaccurate at the date of the signing of the acquisition agree-
ment, prima facie the purchaser will have a claim for damages against the seller for
breach of warranty.
[116] In order to establish liability, the purchaser must show loss. All the loss
claimed must have been caused by the breach, that is, there must be a sufficient
causal connection between breach and the loss sustained, and the loss must not be
too remote.
[117] With regard to remoteness, the loss must either be loss which flows naturally
from the breach (i.e., it is a natural consequence of that breach), or loss, which was
fairly and reasonably contemplated by both parties at the time of entering into the
contract as the probable result of the breach.
[118] Case law49 has rationalized this rule on the basis that it reflects the expecta-
tion to be imputed to the parties, that is, a contract breaker should ordinarily be
liable to the other party for damage resulting from its breach if, but only if, at the
time of making the contract, a reasonable person would have had damage of that
kind in mind as not unlikely to result from a breach. These cases are also authority
for the proposition that a court, having looked at the contract and the commercial
background, can decide that the standard approach will not reflect the expectation
or intention reasonably to be imputed to the parties and so if, on the proper analy-
sis of the contract against its commercial background, the loss was within the scope
of the duty, it cannot be regarded as too remote, even if it would not have occurred
in ordinary circumstances.
[119] In addition, the purchaser must have mitigated its loss. This means that the
purchaser must have taken all reasonable steps, depending on the circumstances of
the case, to minimize the loss and must have refrained from doing anything to
exacerbate the loss.
49 Transfield Shipping Inc v. Mercator Shipping Inc [2008] UKHL 48 and Siemens Building Technologies FE
Limited v. Supershield Limited [2010] EWCA Civ 7.
28

[120] If the purchaser manages to show loss, then the actual measure of damages is
contractual. The aim of contractual damages is to place the injured party, in this
case, the purchaser, in the position that it would have been in had the contract not
been breached. The purchaser is thus entitled to claim for the loss of its bargain.
[121] In the case of a share purchase, the purchaser is entitled to the difference
between the value of the company’s shares assuming the warranties were true and
the value of the company’s shares following the breach of warranty (although the
fact that certain assets are found to have a lower value does not necessarily have an
effect on the value of the company’s shares following the breach). Generally, this
will be the purchase price of the shares less their actual value in the light of the
breach.50
[122] Although most warranty claims settle, if the matter went to litigation, the
court would need to assess the value of the shares in the light of the breach. The
court’s starting point would be an evaluation of the basis upon which the parties
negotiated the purchase price. The purchaser may decide to describe the basis
upon which the price was negotiated in the recitals to the agreement,51 or record it
in its offer letter in order to avoid any later arguments. Each party’s independent
expert would then make an assessment as to what the purchaser would have paid
for the company had it known of the breach of warranty at the time of the acquisi-
tion.
[123] The experts compute a ‘hypothetical purchase price’ applying the same
value basis as the parties originally used on the purchase. The experts will look at
the purpose of the purchaser in buying the company in view of the fact that the
damages must compensate the purchaser’s loss of expectation or bargain.
The Link with a Claim for Misrepresentation
[124] A misrepresentation is a false statement of fact, which has induced the other
party, in this case the purchaser, to enter into the contract. In contrast with a claim
for breach of warranty, inducement is vital. However, a representation need not be
the sole inducement.52
[125] During the often lengthy negotiations for the acquisition, the purchaser will
have sought replies to a range of questions regarding the company and its business.
To the extent that any representations made by the seller are factual and not merely
statements of opinion, there exists the possibility of pursuing a claim for misrepre-
sentation.
50 See Oversea-Chinese Banking Corporation Ltd v ING Bank NV [2019] EWHC 676.
51 The basis of valuation may be commercially too sensitive to disclose in this way.
52 In Richard Edwards v. Jahit Ahmet Ashik [2014] EWHC 2454 (Ch), the court held that, to rebut the
-presumption of inducement in a claim for fraudulent misrepresentation, there needs to be -positive

evidence that the representee was in fact not materially induced to enter the contract by the misrep-
resentation.
29

[126] It may be the case that many of the representations made in the course of
negotiations will be included in the acquisition agreement as warranties. The pur-
chaser will, of course, be able to claim for a breach of warranty if it transpires that a
warranty is untrue. While section 1 of the Misrepresentation Act 1967 (MA) pro-
vides that even when a misrepresentation has been incorporated into the contract,
the innocent party may still rescind the contract. If the misrepresentation is discov-
ered after completion, it will usually be too late to rescind. However, if the pur-
chaser became aware of the misrepresentation in any gap between exchange and
completion, prima facie, the purchaser would have the right to rescind.53 Whether
contractual warranties can be deemed to be representations for the purposes of the
MA is dependent on the construction of the warranties in the relevant agreement.
In Idemitsu Kosan Co Ltd v. Sumitomo Corp54 it was held that, in the context of the sale
of a company, contractual warranties concerning matters of fact did not amount to
representations of fact and, therefore, no claim for misrepresentation was available
to the claimant.
Entire Agreement Clauses
[127] There may also be additional representations made that have not been
repeated in the agreement. With regard to a representation that has not been
included in the agreement, we need to consider the question of entire agreement
clauses. Whether a claim can be brought will depend on whether the seller’s entire
agreement clause is effective.
[128] An entire agreement clause will usually say that there will be no liability for a
promise or representation not contained in the agreement, that is, a pre-
contractual representation, except to the extent that such statements are repeated
in the acquisition agreement or are fraudulent.
[129] An entire agreement clause which explicitly excludes liability and/or rem-
edies for misrepresentation may not be reasonable if it does not distinguish
between fraudulent representations and negligent or innocent representations. In
Thomas Witter Limited v. TBP Industries Limited,55 Jacob J. said that it is not reason-
able to exclude claims for fraudulent misrepresentation, although it may (depend-
ing on the circumstances) be reasonable to exclude liability for innocent or
negligent misrepresentation.
[130] Following the Thomas Witter decision it is, therefore, common practice for
exclusion clauses to carve-out liability for fraud.
[131] Whether an exclusion of liability for negligent and innocent, as opposed to
fraudulent, misrepresentation is reasonable will depend on all the circumstances of
53 Rescission is an equitable remedy and will not be available if there exist any ‘equitable bars’, for
-example, it is impossible to put the parties back to their previous position, rescission would preju-
dice an innocent third party or when there has been undue delay.
54 [2016] EWHC 1909 (Comm).
55 [1996] 2 All ER 573.
30

the case. In a share purchase agreement between two business entities, both of
whom are represented, such a clause would be more likely to be reasonable.
[132] It is also common for entire agreement clauses to specify that there has been
no reliance on any pre-contractual representations. These clauses should work to
prevent any pre-contractual statements becoming misrepresentations by removing
the necessary element of reliance (or inducement). Furthermore, if they fail to work
in this manner, such non-reliance clauses may act as an evidential estoppel in
favour of the representor. Depending on the circumstances, a non-reliance clause
may operate as an exclusion clause and thus be subject to the MA.
[133] No representation or non-reliance wording can also act as a form of contrac-
tual estoppel. Springwell Navigation Corporation v. JP Morgan Chase Bank56 con-
firmed that the parties to a contract may agree to assume that a certain state of
affairs exists at the time the contract is concluded, or has existed in the past, even if
that is not in fact the case. The parties are then prevented from asserting that the
true facts were different. For example, a clause stating that no representations have
been made would prevent a party from claiming that representations had in fact
been made. More generally, the case of AXA Sun Life Services plc v. Campbell Martin
Limited57 reaffirms the importance of using clear, unequivocal language to preclude
liability for misrepresentation.58
[134] In the case of Sutcliffe v. Lloyd and another,59 the Court of Appeal held that a
party may be able to rely on extraneous representations to bring a claim, notwith-
standing the existence of an entire agreement clause, when the representations are
made after the date of the agreement. In addition, the entire agreement clause in
Sutcliffe stated that the agreement represented the entire understanding between
the parties in relation to ‘the matters dealt with’ in the agreement and the Court of
Appeal held that when the agreement does not ‘deal with’ the issue concerned,
extraneous material can be relied upon as the entire agreement clause is not
engaged.
Remedies for Misrepresentation

[135] If the purchaser decides to pursue a misrepresentation claim, the availability
of remedies and the quantum of damages depend on the categorization of the mis-
representation as fraudulent, negligent, or innocent.
[136] Although rescission is available for both negligent and innocent misrepre-
sentation, the court can use its discretion to award damages in lieu of rescission.
Rescission is therefore only a ‘right’ in the context of fraudulent misrepresenta-
tion.60
56 [2010] EWCA Civ 1221.

57 [2011] EWCA Civ 133.
58 See also Al-Hasawi v Nottingham Forest Football Club Ltd [2018] EWHC 2884 (Ch)
59 [2007] EWCA Civ 153.
60 An example of this remedy is provided by the case of Erlson Precision Holdings Ltd (formerly GG 132
Ltd) v. Hampson Industries plc [2011] EWHC 1137 (Comm) where the purchaser of a company who
31

[137] Damages are available for both fraudulent and negligent misrepresentation.
Such damages are measured on a tortious basis. There are no damages as of right
for an innocent misrepresentation. However, as we noted above, the court may
exercise its discretion to award damages in lieu of rescission, although authority
seems to support the view that no award for damages can be made once the ability
to rescind has been lost.61 As we shall consider, the measure of damages for an
innocent misrepresentation is not thought to be tortious.
[138] We have noted that the aim of contractual damages is to put the purchaser in
the position that it would have been in had there been no breach of warranty. Dam-
ages for misrepresentation (other than innocent misrepresentation), however, are
assessed on a tortious, rather than a contractual, basis. This means that the aim
would be to put the purchaser in the same financial position in which it would have
been had the tort not been committed, namely if the misrepresentation had not
been made. Tortious damages do not therefore compensate for loss of bargain.
[139] As far as fraudulent misrepresentation is concerned, on a share purchase
transaction, the normal measure of damages is highly likely to be the purchase
price of the shares less their value at the time of the acquisition.
[140] Consequential losses may be available and their calculation will be higher in
tort than under contract. The House of Lords in Smith New Court Securities Limited v.
Citibank N.A.62 confirmed the principles for the assessment of damages in the event
of fraudulent misrepresentation as follows:
– the defendant is bound to make reparation for all the damage, including
consequential loss, directly flowing from the transaction;
– although the damage need not have been foreseeable, it must have been
directly caused by the transaction; and
– the claimant has to take all reasonable steps to mitigate its loss once the fraud
has been discovered.
[141] This measure of damages is more generous than its breach of warranty coun-
terpart. However, fraud is difficult to establish.
[142] In addition, a criminal offence may be committed under the Fraud Act. The
offence of fraud by false misrepresentation is committed when a person dishonestly
makes a false representation and intends, by making the representation, to make a
gain for himself or herself or another, or to cause loss or exposure to risk of loss to
another. For these purposes, a representation is false if it is untrue or misleading63
and the person making it knows that it is, or might be, untrue or misleading. The
offence of fraud by failing to disclose information is committed when a person dis-
honestly fails to disclose to another person information that it is under a legal duty
to disclose and intends, by failing to disclose the information, to make a gain for
was induced to enter into a share -purchase agreement by a fraudulent misrepresentation relating to
profit forecasts was entitled to rescind the contract.
61 The Government of Zanzibar v. British Aerospace (Lancaster House) Ltd [2000] 1 WLR 2333.
62 [1997] AC 254.
63 Section 2 of the Fraud Act.
32

himself or herself or another, or to cause loss or exposure to risk of loss to

another.64 ‘Legal duty’ includes duties under statute and under written contracts,
and so could apply to contractual undertakings to make disclosure between signing
and completion. Penalties by way of fine and up to ten years imprisonment apply.
[143] As regards negligent misrepresentation, the basic measure of damages
under the MA is the same as the measure of damages for fraud.65 This means that,
generally, damages will be awarded to put the claimant in the position in which it
would be if the contract had never been entered into. Consequential loss is there-
fore recoverable. It is unclear whether unforeseeable losses are recoverable or
whether losses may include compensation for falls in value unrelated to the negli-
gent statement (as would be the case with damages for fraud).
[144] As far as innocent misrepresentation is concerned, the damages are not tor-
tious but something less. The measure of damages will probably be the purchase
price less the actual value of the shares, but not consequential loss. This will most
probably pay out less than a breach of warranty claim.
[145] The effect of the above is that damages for misrepresentation may lead to a
larger recovery for a purchaser than damages for breach of warranty. However, a
claim for misrepresentation is likely to be more difficult to sustain. If the seller’s
entire agreement clause is enforceable, the purchaser is left only with fraudulent
misrepresentation claims as regards representations outside the agreement. It is
important to remember that fraudulent misrepresentation is the hardest type of
misrepresentation to establish.
[146] The seller should take particular care whom it holds out as representing it
during negotiations following MAN Nutzfahrzeuge AG v. Freightliner Limited,66 in
which it was held that the seller was liable for fraudulent statements made by the
financial controller of the target.
[147] The seller should be aware that, in the context of negligent misrepresenta-
tion, a continuing representation that remains in effect until the contract is con-
cluded may continue to have causative effect even where the contracting parties are
not the original representor and representee, if the representee is deemed to be an
agent of the contracting party.67
3.3.2 Multiple Sellers
Identity of Warrantors
[148] The sellers of the target company and the persons who give the warranties
are not always the same. Some sellers may be unwilling to accept, or may attempt to
64 Section 3 of the Fraud Act.

65 Royscot Trust Ltd v. Rogerson [1991] 2 QB 297.
66 [2005] EWHC 2347 (Comm), affirmed by [2007] BCC 986 (CA).
67 Cramaso LLP v. Viscount Reidhaven’s Trustees [2014] UKSC 9.
33

limit, their share of liability, for example, when those sellers are minority share-
holders and have not participated in the management of the company, or when
they are trustees. Such sellers will often argue that the executive sellers have the
knowledge of the affairs of the target company and, therefore, they should give the
warranties. In addition, trustees will often contend that they should give no war-
ranties, or only very limited warranties; for example, warranties relating to capac-
ity68 and title only, because they do not have the power to give fulsome
warranties.69 Trustee sellers often argue that they cannot give warranties or indem-
nities without risking personal liability to the beneficiaries of the relevant trust.70
[149] As we have considered,71 traditionally, warranties are information seeking.
However, as the due diligence exercise has become increasingly comprehensive,
this role has become less important. Essentially, their primary role now is to pro-
vide a contractual post-completion price adjustment mechanism. As such, their
real function is to impose financial risk on the warrantors and not to extract infor-
mation about the target.
[150] Putting warranties in this context, it is not unreasonable for a purchaser to
seek to impose financial risk on all the sellers regardless of whether they have been
involved in the management of the target.
Liability of the Warrantors
[151] When there is more than one warrantor, the purchaser will usually want the
warrantors’ liability to be expressed as being ‘joint and several’ rather than ‘joint’
or ‘several’. This means that whatever rights of contribution each warrantor may
have against each of the others (whether under the Civil Liability (Contributions)
Act 1978, the share purchase agreement or a separate agreement) the purchaser
will be able to choose all or any of the warrantors to sue for the total liability for
breach of any warranties. This passes from the purchaser to the warrantors the risk
68 A purchaser should certainly seek a capacity warranty in respect of individual sellers, including trust-
ees who are individuals. Individuals must be older than eighteen, not bankrupt and of sound mind.
In addition, trustees should warrant that they have the power and authority to enter into the acqui-
sition agreement. If a trustee lacks such power and authority, this warranty will do no more than con-
fer a claim against the trustee for breach of warranty of authority. There will be no right of access to
the trust assets if the acquisition is outside the powers of the trustee or an improper exercise of those
powers. (If, however, the warranty is given by each seller and not merely the trustees, the purchaser
may be able to pursue a warranty claim against the other sellers).
69 Alternatively, or in addition, the warranties that are given may be qualified by, for example, the
words ‘to the best of the seller’s knowledge, information and belief ’.
70 A purchaser who knowingly buys shares from trustees is usually fixed with constructive notice of the
relevant trust instrument. The trust instrument must therefore be examined. The trust instrument is
likely to confer an express power to sell (a purchaser must check this and must consider whether the
power to sell is limited in any way (e.g., by the need to seek the approval of the beneficiaries)).
Although most modern trust instruments confer an express power to give warranties, if a trust
instrument does not confer such a power, the question that needs to be considered is whether there
is an implied power to give warranties and indemnities. It is arguable that if a trustee has the power
to sell and to negotiate that selling price, the trustee should be able to give warranties.
71 See the discussion relating to the changing role of warranties and due diligence in the section deal-
ing with warranties, above.
34

that, if a claim is made, a warrantor may not be traceable or may not meet their
share of the liability.
[152] From the warrantors’ perspective, this risk should not initially be accepted.
Joint and several liability, or indeed joint liability, is clearly unacceptable if a war-
rantor can be liable for more than its share of any liability. If the warrantors do
accept joint or joint and several obligations, they should agree amongst themselves
that, in the event of liability arising, they will make payments to ensure that any
liability (including costs) is borne, for example, in proportion to the number of
shares sold by each of them. Such an agreement would be recorded in the share
purchase agreement or be set out in a separate contribution agreement. Most com-
monly, complications arise when not all the sellers are giving all the warranties (this
is often the case where there are trustee sellers).
[153] The use of the word ‘several’ does not in itself place any limitation on the
liability of each of the sellers. When the obligations of the sellers are expressed to
be ‘several’, each seller will be liable for their own performance and breach and the
corresponding loss caused. This is fairly straightforward when warranties or obliga-
tions are personal to a particular seller. Thus, in the case of a warranty in which
each seller severally warrants title to its own shares, each seller would be liable on
breach for any corresponding loss caused by the defective title to its own shares.
However, when the sellers severally warrant, for example, the financial statements
of the target company, the position is less straightforward and each seller could be
potentially sued by the purchaser for the total loss that it suffers (subject to statu-
tory or contractual contribution rights against the other sellers). Therefore, when
warranties or obligations are not personal to particular sellers and several liability
is accepted, it should be borne in mind when acting for the sellers that mere inclu-
sion of ‘several liability’ wording will be insufficient to limit each seller’s individual
liability to a proportion of the sale proceeds.
[154] A seller may therefore wish to cap its liability. There are two main ways of
achieving this. It may be stated that each warrantor is liable only for an appropriate
proportion of any claim, for example, the proportion the warrantor receives of the
total consideration. An approach that may be more acceptable to the purchaser
would be to provide that the total liability of each warrantor has an upper limit, for
example, the amount of the sale proceeds that the warrantor actually receives. The
latter approach would mean that, in respect of a particular claim, the purchaser
could recover the total amount from a single warrantor (subject to the total limit on
that warrantor’s liability) rather than having to recover from multiple warrantors.
[155] The best position for sellers is to have several liabilities and for each seller’s
liability, as between themselves and the purchaser, to be capped in one or both of
the ways outlined above. The purchaser is likely to resist such a proposition.
3.3.3 The Disclosure Exercise
[156] The disclosure letter takes the form of a letter, usually from the seller to the
purchaser, and is dated the same date as the acquisition agreement to which it
relates.
35

[157] The disclosure letter sets out information about the target company or busi-
ness that is inconsistent with the warranties in that acquisition agreement. The
acquisition agreement will provide that the warranties are given subject to matters
disclosed in the disclosure letter. The acquisition agreement will therefore make
specific reference to the disclosure letter, providing that it operates so as to limit the
scope of the warranties.
The Function of the Disclosure Letter
[158] From the perspective of the seller, the sole function of the disclosure letter is
that it provides a limitation on its liability under the warranties contained in the
acquisition agreement.
[159] As far as the purchaser is concerned, the disclosure letter has two principal
functions. First, it flushes out information about the target business that may be
pertinent to the running of that business and may not necessarily have been pro-
vided by the due diligence exercise. Second, it will almost certainly identify various
problem areas, which need to be tackled or addressed. These potential problem
areas may lead, for example, to the structure of the transaction changing, perhaps
to an asset rather than a share sale, or the terms of the acquisition agreement being
renegotiated (probably to include indemnities from the seller). In extreme cases,
problem disclosures can lead to the purchaser withdrawing completely from the
transaction.
[160] As due diligence exercises have become more sophisticated and comprehen-
sive in recent years, it is the risk allocation, rather than the information giving func-
tion, which has become increasingly significant in the eyes of the purchaser.
The Form of the Disclosure Letter
[161] The body of the disclosure letter itself consists of various numbered para-
graphs which fall into one of three categories:
(1) interpretation provisions;

(2) general disclosures; and
(3) specific disclosures.
[162] In addition, the disclosure letter will have attached to it copies of documents
which are referred to in the disclosure letter, the contents of which are also dis-
closed. It is also good practice to include the information that is warranted in the
acquisition agreement or produced to the purchaser, such as the warranted articles
of association. These documents are together known as the disclosure bundle.
General Disclosures
[163] General disclosures are subject to some standardization and are disclosed
against all the warranties. Examples of general disclosures commonly encountered
in a seller’s first draft disclosure letter are those relating to:
36

– Searches: The purchaser is deemed to have full knowledge of all matters that
would be revealed by a search of the full files relating to the target company
at company’s house.
– Statutory Books: All matters disclosed in the statutory books of the target com-
pany, including its board minutes, are deemed to be disclosed.
– Accounts: All information contained or referred to in the audited accounts for,
say, the last three years, and the notes to and reports on those accounts are
deemed to be disclosed.
– Correspondence: All correspondence passing between the seller and purchaser
and their respective employees and professional advisers is deemed to be dis-
closed.
– Public Domain: All matters within the public domain, or a matter of public
record, are deemed to be disclosed.
– The Due Diligence Exercise: All information contained in the data room is
deemed to be disclosed.
– Advisers: All emails or documents sent to the purchaser’s advisers are deemed
to be disclosed.
[164] General disclosures will be the subject of negotiation between the parties’
respective solicitors. For example, the purchaser’s solicitors will almost certainly
seek to strike out the public domain and advisers’ disclosures.
[165] It is important for the seller to be aware that, where the acquisition agree-
ment requires ‘fair’ disclosure, general disclosures are no substitute for specific dis-
closure in appropriate circumstances. It is not sufficient merely for the seller to give
notice to the purchaser that there may be a problem as regards a particular war-
ranty. A number of cases72 have suggested that, when the acquisition agreement
requires ‘fair’ disclosure, disclosures must be specific if they are to afford the seller
any protection. These cases suggest that merely giving the purchaser the means of
working out a disclosure will not necessarily constitute a fair disclosure; fair disclo-
sure requires some positive statement of the actual position. However, following
Infiniteland Ltd v. Artisan Contracting Ltd,73 where the acquisition agreement does
not require ‘fair’ disclosure, the courts will determine the adequacy of disclosure by
applying general contractual principles of interpretation to the acquisition agree-
ment, and not by applying an implied test of ‘fair’ disclosure. A general disclosure
may in such circumstances be effective to prevent liability.
[166] MAN Nutzfahrzeuge AG v. Freightliner Limited74 also illustrates the fact that
seller-friendly drafting of general disclosures can undermine the purchaser’s war-
ranty protection. Purchasers should be wary of deemed disclosure of matters which
should be detected from a ‘reasonable investigation’, ‘thorough examination’ or
similar.
72 Levison and others v. Farin and others [1978] 2 All ER 1149, New Hearts Limited v. Cosmopolitan Invest-
ments Limited [1997] 2 BCLC 249 (Court of Session interlocutory hearing), endorsing the Levison
approach, and Daniel Reeds Limited v.Em-Ess Chemists Limited [1995] CLC 1405.
73 See the section dealing with the purchaser’s knowledge and due diligence, above, at para. [87].
74 [2005] EWHC 2347.
37

Specific Disclosures
[167] Specific disclosures will be tailored to each particular transaction. They spe-
cifically disclose actual matters relating to the target that, if not disclosed, would
constitute a breach of warranty. It is these disclosures that flush out the information
about the target and its business and may identify potential problem areas that
often lead to renegotiation of the terms of the acquisition.
[168] To take an example: An acquisition agreement contains a warranty that no
legal proceedings have been issued against the target company. If no disclosure is
made to the effect that proceedings have in fact been issued (and provided the pur-
chaser has no actual knowledge of this fact), then any liability that might arise in
respect of proceedings that have been issued would rest with the seller. The seller in
this case would almost certainly disclose in the disclosure letter that such proceed-
ings have been issued. This would have the effect of depriving the purchaser of any
breach of warranty claim in respect of those proceedings.
[169] Further, if a substantial sum was being claimed, the purchaser would prob-
ably demand a covenant or indemnity from the seller not only in respect of the pro-
ceedings that have actually been issued but also in respect of any other proceedings
that may be issued in the future arising from similar circumstances. The impor-
tance of careful drafting of this type of purchaser protection has been exemplified
in the series of Supreme Court cases on contractual interpretation, including
Arnold v. Britton75 and Wood v. Capita Insurance Services Ltd,76 where the Supreme
Court has taken a strictly literal interpretation on contractual provisions.
[170] The purchaser may also ask for a retention in order to secure its position fur-
ther. This would mean that the purchaser would retain or hold back part of the pur-
chase price for a specified time after completion, in our example, until the
outcome of the litigation was known, and apply the sum towards any actual liability
that arises under the warranties or, if applicable, the specific covenant or indem-
nity.
Drafting and Negotiating a Disclosure Letter
Timing
[171] The purchaser will want to see the seller’s first draft of the disclosure letter as
soon as possible. Because the disclosure letter will nearly always show previously
undiscovered problems, the seller may tactically decide to hold back the first draft
in the hope that the purchaser is less likely to insist on covenants or indemnities or
to renegotiate the deal in any major way the nearer the scheduled date of exchange
becomes. Typically, the most sensitive disclosures are held back until the seller is
confident that the transaction will proceed to exchange.
75 [2015] UKSC 36
76 [2017] UKSC 24
38

[172] The disclosure letter will be updated constantly, and so the solicitor acting
for the purchaser must endeavour to agree with the seller’s solicitor a cut-off point.
However, if last-minute disclosures are sent through, it may be difficult for the pur-
chaser to refuse to accept those disclosures by virtue of the fact that any actual
knowledge of a problem could, in any event, prejudice its ability to bring a claim for
breach of warranty.77
Standard of Disclosure
[173] It has become much more common, following New Hearts,78 for purchasers
to seek to define more precisely the standard of disclosure by including a more
detailed definition of ‘Disclosed’ in the acquisition agreement, which may often
include the concept that all disclosures must be full, fair, and specific. Where such a
definition is included, this will need to be reflected in the disclosure letter.
[174] Although the seller may attempt to delete any reference to the disclosures
being full, fair, and specific, in light of Infiniteland, the purchaser may be more
inclined to reject widely drafted general disclosures that could undermine the war-
ranty protection. In the absence of qualitatively defined standards of disclosure, a
purchaser may be reluctant to accept any general disclosures, including the con-
tents of any data room.
Actual Knowledge and Disclosure
[175] In the context of disclosures, Eurocopy and Infiniteland should be noted.79

The combined effect of these cases would seem to be that if a purchaser’s actual
knowledge is to be relied upon by a seller as precluding a claim for breach of war-
ranty, then express provision to that effect should be included in the agreement. An
express provision to the contrary (that the purchaser’s knowledge will not preclude
a warranty claim) may not, however, be equally effective.
[176] In the absence of express provisions either way, it is important to meet the
standard of disclosure required by the acquisition agreement. When the acquisition
agreement imposes a standard of at least ‘fair’ disclosure (which is usually the case),
no reliance can be placed on a general disclosure fixing a purchaser with actual
knowledge of a matter which is not otherwise specifically disclosed (fairly or other-
wise) to preclude a claim for breach of warranty. Specific disclosures rather than
general disclosures would therefore be needed.
[177] It should be remembered that both Eurocopy and the relevant obiter dicta
regarding purchaser’s knowledge in Infiniteland are non-binding, and therefore
there is still uncertainty as to how a court might find in the future. In light of this
uncertainty, if the draft disclosure letter reveals a potential problem, the purchaser
77 See the discussion of actual knowledge, above.

78 New Hearts Limited v. Cosmopolitan Investments Limited [1997] 2 BCLC 249 (Court of Session interlocu-
tory hearing)
79 Considered above: See Due Diligence and the discussion in relation to the purchaser’s knowledge
and due diligence.
39

cannot then seek to resolve it simply by deleting the offending disclosure. The
problem needs to be properly addressed, for example, by the purchaser asking for
a covenant or an indemnity.
[178] This results in the position that specific disclosures in particular are subject
to limited negotiation. Any negotiation will focus on making the disclosures clear
and unambiguous and in confronting the potential problems they may present.
Should the Disclosure Letter Be Warranted?

[179] The first draft of any acquisition agreement may provide that the disclosure
letter is warranted. The seller should, and usually will, strongly resist this. Warrant-
ing disclosures is considered to be conceptually flawed – disclosures are intended to
limit liability under the warranties (provided they satisfy the agreed disclosure stan-
dard), not to extend their scope. If they are not ‘fair’, they will not effectively limit
the relevant warranty and a potential claim may arise – but on the original war-
ranty, not out of an extension of that warranty by virtue of the disclosure itself hav-
ing been warranted.
[180] A compromise position may be reached, whereby the seller may, for
example, agree to warrant either the factual information and/or any expressions of
opinion set out in the disclosure letter itself (usually called the disclosure narrative)
but not the information set out in the documents attached (or deemed to be
attached) to it.
A Gap Between Exchange and Completion
[181] In circumstances in which there is an interval of time between exchange and

completion, the purchaser will usually ask for the warranties that have been given
as at exchange to be repeated as at completion. However, matters may arise
between exchange and completion which need to be disclosed by the seller. We con-
sidered the position in relation to disclosures against repeated warranties in the
context of repetition of warranties.80
Deliberate Non-disclosure
[182] A seller is bound to make disclosures even where it suspects that this may
lead to the purchaser withdrawing from the transaction. In addition to possible
liability under the common law, the seller may incur criminal liability under Part 7
of the FS Act. As we noted earlier in the context of due diligence, section 89 (Mis-
leading statements) of the FS Act provides that any person who, inter alia, dishon-
estly conceals any material facts is guilty of an offence if the person does so for the
purpose of inducing, or is reckless as to whether it may induce, another person to
enter a relevant agreement.81
80 See the section dealing with warranties, above.

81 Considered also in the context of acquisitions of public companies, below.
40

[183] The term ‘relevant agreement’ includes a share sale agreement but not an
asset sale agreement. Anyone convicted under this section can face an unlimited
fine and up to seven years’ imprisonment.
[184] In addition, under the Fraud Act, the criminal offence of ‘fraud by failing to
disclose information’ is committed when a person dishonestly fails to disclose to
another person information which that person is under a legal duty to disclose and
intends, by failing to disclose the information, to make a gain for himself or herself
or another, or to cause loss or exposure to risk of loss to another. ‘Legal duty’
includes duties under statute and under written contracts, so could apply to con-
tractual undertakings to make disclosure between signing and completion. Penal-
ties by way of fine and up to ten years’ imprisonment apply.
Data Rooms and Disclosure
[185] When the seller has established a data room in order to carry out the due
diligence exercise, it may seek to disclose everything in the data room by way of a
general disclosure in the disclosure letter. In such circumstances, purchasers will
need to exercise caution to ensure that the facts and matters deemed to have been
disclosed are facts and matters that the purchaser and its advisers have considered
properly during due diligence. In particular, purchasers should be very cautious
when there is deemed disclosure of facts and matters that should be detected from
a ‘reasonable investigation’, ‘thorough examination’, or similar.
[186] However, the seller must be aware that deemed disclosure of everything in
the data room may not be effective, depending on the provisions of the acquisition
agreement. As we considered above, if the acquisition agreement requires ‘fair’ dis-
closure, merely giving the purchaser the means of working out a disclosure will not
necessarily constitute disclosure; disclosure would require some positive statement
of the actual position. Further, regardless of whether or not such a disclosure is
agreed by the purchaser, the purchaser should be advised that if it and its advisers
have reviewed the data room material, any actual knowledge of a matter might pre-
vent it from bringing a warranty claim in any event.82
Indemnities and Covenants
[187] If a significant potential problem with the target has been identified, it is
likely that warranty protection will not be effective. The matter will almost certainly
be disclosed in the disclosure letter, so limiting the scope of the warranty. The pur-
chaser will be expected to mitigate its loss. Further, the damages that would be
awarded in respect of a successful warranty claim would depend on the purchaser
showing that it would have paid less for the shares or assets if it had known in
advance of the matter that constitutes a breach of warranty. The purchaser will have
carried out a comprehensive due diligence exercise and may have actual knowl-
edge of the problem. There is an additional problem in the context of a share sale.
For example, if the seller warranted that a property was worth GBP20 000 000 and
82 See the discussion of the purchaser’s knowledge in due diligence, above.
41

it later transpired that the property was worth only GBP10 000 000, it is unlikely
that the purchaser could recover the full amount of the shortfall from the seller.
The purchaser has bought shares in the company that owns the property, not the
property itself. The value of the shares might be totally unaffected. Even if the
value of the shares is affected, it is unlikely that the shares will be worth the full
GBP10 000 000 less.
[188] If the scale of the potential problem the purchaser has identified is uncer-
tain, meaning a straightforward price reduction is not a workable solution, a spe-
cific indemnity or covenant might be the answer. This is subject to the financial
standing of the seller and also presumes that the problem is not so fundamental
that aborting the transaction is, in fact, the best solution.
[189] If an indemnity is included in response to a specific issue, care must be taken
to ensure that the indemnity as drafted is precisely responsive to the issue, since
indemnities are fertile ground for disputes. The importance of this is well illus-
trated by Al-Hasawi v Nottingham Forest Football Club Ltd.83
[190] An indemnity arises when the seller agrees to compensate the purchaser on
a pound-for-pound basis for loss that the purchaser may sustain through the hap-
pening of a specified event. This will avoid the need for the purchaser to mitigate
its loss and can be used in an assets sale to enable the purchaser to claim the whole
amount of any shortfall in value of the assets it has purchased that arises as a result
of a breach of warranty. Actual knowledge by the purchaser of the facts that consti-
tute the specified event should not affect the claim because the purchaser will have
relied on the indemnity in agreeing the price it was prepared to pay for the assets.
[191] There is a problem with the use of indemnities in the context of a share sale.
In this situation, the purchaser will not have suffered loss unless it can show that it
would have paid less for the shares. Even the target company may not be regarded
as suffering a loss as a result of the breach of warranty. In our example of the over-
valued property, the value of the property has not changed; it has simply been
overstated. The company is therefore in the same position regardless of the breach
of warranty. When the target company has actually suffered a loss, it may be pos-
sible to use the Contracts (Rights of Third Parties) Act 1999 (Third Parties Act)84 to
83 [2019] EWCA Civ 2242. The seller had indemnified the buyer for the target’s liabilities to the extent
that they exceeded GBP6.6 m at the cut-off date. The GBP6.6 m figure was an assessment of the tar-
get’s liabilities at the cut-off date, based on a summary of its financial information, provided by the
seller and prepared in accordance with FRS 102. The indemnity did not specify the basis upon which
the target’s liabilities were to be calculated for the purposes of determining whether and to what
extent they exceeded GBP6.6 m at the cut-off date. The buyer argued that they should be calculated
in accordance with FRS 102 (i.e. the basis of preparation of the financial information from which the
GBP6.6 m was derived), whereas the seller argued that the indemnity as drafted excluded liabilities
incurred prior to the cut-off date but relating the period after the cut-off date (i.e. where the buyer
would enjoy the benefit). The trial judge adopted the seller’s construction, but this was overturned
on appeal. See also Gwynt Y Mör Ofto Plc v Gwynt Y Mör Offshore Wind Farm Limited and others [2020]
EWHC 850 (Comm), which highlights the need for precision in defining the period covered by the
indemnity.
84 See para. 215 onwards.
42

give the company itself rights to enforce an indemnity. However, an easier way to
deal with the issue is to use a covenant rather than an indemnity.
[192] In this context, a covenant is an undertaking by the seller to pay the pur-
chaser a sum of money equal to any diminution in the target company’s value
attributable to the breach of warranty. The amount payable need not be fixed as
long as the amount is ascertainable when payment is due. The use of a covenant
avoids the need for the purchaser to show that it has suffered any loss, in addition
to avoiding the need to mitigate loss. As with an indemnity, actual knowledge by
the purchaser about the facts that constitute the breach of warranty should not
affect the claim, because the purchaser will have relied on the covenant in agreeing
the price it was prepared to pay for the shares. Care must be taken when drafting to
ensure that it is clear whether a provision is intended to take effect as a covenant or
an indemnity. It is not a matter of straightforward categorization, but of giving
effect to the language of the provision, as set against the factual matrix, in the con-
text of the agreement, while applying general principles of contractual interpreta-
tion.85
[193] When drafting indemnities, it should be borne in mind that the tax treat-
ment of indemnity payments can vary depending on the identity of the recipient.
In order to minimize the risk that an indemnity payment could be taxable on
receipt, it is generally preferable for indemnities to be expressed as being in the
purchaser’s favour (rather than the target company’s).
[194] Following the case of Zim Properties Limited v. Procter,86 the contingent right of
a target company to sue the seller under the terms of an indemnity could be
regarded as an asset for the purpose of the taxation of capital gains, and an indem-
nity payment as the proceeds from the disposal of that asset. As the target company
would typically have zero tax basis in the asset, having provided no consideration
for it, it is likely that the full amount of the indemnity payment would be subject to
corporation tax. In contrast, HM Revenue & Customs (HMRC) has confirmed in
extra-statutory concession D33 that, if a payment is made by the seller to the pur-
chaser under ‘a warranty or indemnity included as one of the terms of a contract of
purchase and sale’, normally no immediate charge to tax would arise. Instead, the
payment would be treated as reducing the purchaser’s tax basis in the target com-
pany shares and the seller’s sale proceeds would be adjusted downwards under sec-
tion 49 Taxation of Chargeable Gains Act 1992 (TCGA).
[195] Another question which will arise is whether the indemnity or covenant
excludes the common law right to damages. It is important for the purchaser to
preserve its options and ensure that the acquisition agreement does not preclude
the ability to bring a damages claim.
85 AXA SA v Genworth Financial International Holdings Inc [2019] EWHC 3376 (Comm).
86 [1985] STC 90.
43

3.3.4 The Seller’s Limitation on Liability
[196] The purchaser’s entitlement to claim for breach of warranty (and possibly
for breach of indemnity, covenant or for misrepresentation) can be excluded or
made subject to limitations by the seller.
[197] Liability should always be excluded to the extent that there is disclosure by
the seller in the disclosure letter. In addition to the seller’s ability to disclose, there
will be limitations on its liability under the warranties. Such limitations are often set
out in a schedule to the main agreement.
[198] The acquisition agreement may state that the limitations are only to have
effect if there has been no fraud or dishonesty on the part of (any of) the seller(s), or
its (their) agents or advisers. The seller would be advised to argue that it has no
control over its agents and advisers and therefore cannot be responsible for them.
[199] As regards the limitations to be included in the agreement, much will
depend upon the circumstances of the sale in question as to which limitations are
appropriate. The seller should endeavour to agree the most important of these
with the purchaser at the same time as the price to be paid for the company is
agreed.
[200] Set out below are some common limitations on the seller’s liability.
Limitation on Quantum
[201] This is the most common type of limitation.

[202] The seller may ask for a ‘de minimis’ limit as well as a threshold that must be
met before claims can be brought. The arguments for such a claims threshold are,
first, that no purchase value of a company can be fixed with absolute certainty and
that there must be some margin for flexibility. Second, the seller does not wish to be
troubled by irritating small claims when its costs of mounting a defence may be
higher than the sum claimed by the purchaser.
[203] The seller will wish to include a statement to the effect that the liabilities of
the seller should be limited to the amount by which the aggregate amount exceeds
the claims threshold. However, the purchaser will argue that once the claims
threshold has been reached, claims should be possible in respect of all the aggre-
gate amount. The purchaser’s rationale for this argument is that the reason for the
claims threshold is the avoidance of small claims and, therefore, once the threshold
is reached, the claims are no longer ‘small’.
[204] The ‘de minimis’ limit is applied to each claim individually and is usually fixed
at a small amount. The seller’s argument is that the sale should be looked at in the
round and that the purchaser should not be free to proceed with individually insig-
nificant claims to make up a total claim. If a purchaser accepts this argument, it will
want to ensure that claims flowing from a common source, or of a similar nature,
are not treated as individual claims below the minimum figure.
44

[205] The seller must include a maximum amount or ‘cap’ that may be claimed by
the purchaser; this is normally the total consideration or a percentage of it. The
reason for this is that it is possible, at least in theory, for damages for breach of war-
ranty or any payment under, for example, an indemnity, to exceed that amount.
Although the purchaser may respond by stating that the seller should be confident
that breaches will not result in liabilities approaching this level, often the purchaser
will accept such a limit.
Time Limits for Bringing Claims
[206] The seller will wish notification of any claim to be made within a specified
period. Under the Limitation Act 1980 (LA), there is normally a six-year limitation
period in which to bring warranty claims and this period is extended to twelve
years when the warranties are in a deed.
[207] The LA is silent as to whether it is possible for the parties to a contract to
extend or shorten the statutory limitation period by agreement. The weight of
authority suggests that they can, and that such an agreement operates by way of
waiver or estoppel.
[208] Extending limitation periods raises a public policy issue. If disputes are
brought to trial years after the events giving rise to them, there is then a risk that
the available evidence may well have deteriorated and it is no longer possible to
have a fair trial. This will be the case when the extension is considerably greater
than the statutory limitation period. Shortening limitation periods gives rise to any
applicable exclusion clause considerations.
[209] In practice, it is common for agreements to specify time limits within which
claims must be notified. It is also common that different time limits apply depend-
ing on the type of claim. Tax claims, for instance, tend to be subject to longer time
limits than other claims. To reflect the fact that HMRC is ordinarily entitled to look
into tax matters for four years or, in the case of careless behaviour by the taxpayer
or persons acting on the taxpayer’s behalf, six years after the date of filing a year’s
tax return, the purchaser will usually require that claims relating to tax matters may
be brought within seven years of completion. The purchaser will also usually
attempt to negotiate an extended period in which environmental claims may be
brought. It is usual to agree a shorter period for other general warranty claims.
One to two years is common, allowing the purchaser to conduct one or two audits of
the target, although shorter periods are sometimes agreed.
[210] Further limitations that the seller may wish to include are that any claims for
breach of the warranties are notified to the seller as promptly as possible, and for
such notification in any event to be made within a finite period. The case of Senate
Electrical Wholesalers Limited v. Alcatel Submarine Networks Limited87 illustrates that a
clause requiring notice of a claim for breach of warranty to be given within certain
time limits or to take a specified form (in the Senate case, the notice provision
87 [1999] 2 Lloyd’s Rep. 423. See also Forrest and another v. Glasser and another [2006] 2 Lloyd’s Rep. 392
and Home Doors (GB) Ltd v. Michael Charles France [2002] EWCA Civ 1122.
45

required the grounds on which the breach of warranty is based to be set out), must
be considered carefully at the negotiation stage.88 More importantly, once a dis-
pute arises, the party giving notice must ensure that the clause is satisfied as
drafted.89
Conduct of Litigation
[211] It is often the case that the seller will suggest that when there is a claim
against the company that might result in the purchaser bringing an action against
the seller, the seller should be the person who controls the litigation in view of the
fact that it will be the seller who pays if the third-party claim is successful.
[212] However, the purchaser may be reluctant to deliver control of the litigation
to the seller when the way in which the litigation is conducted can affect the repu-
tation and goodwill of the business it has acquired. A compromise can often be
reached. For example, whoever has control of the litigation has limits imposed as
regards how it can conduct such litigation without the consent of, or consultation
with, the other party.
Acts of the Purchaser
[213] The seller may attempt to exclude liability when the damage from a breach
of warranty arises only because of some voluntary act or omission of the purchaser
after completion.
[214] The purchaser may feel that this is too great a restriction on its freedom of
movement and may ask the seller to specify those things that a purchaser should
not do after completion in order for it to be able to assess the impact of such con-
straints on the price it is willing to pay.
The Contracts (Rights of Third Parties) Act 1999
[215] The Third Parties Act impacts on a wide range of contracts. Acquisition
agreements are no exception.
[216] The Third Parties Act does not abolish the doctrine of privity of contract but
modifies an element of it. In certain circumstances, it enables third parties to
enforce contractual benefits in their own right (without employing the device of a
trust of a promise or an assignment). When a third-party right of enforcement does
arise as a result of the Third Parties Act, the Third Parties Act gives the third party
other rights, for example, a qualified right to block rescission or variation of the
relevant contractual terms by the contracting parties.
[217] Section 1 of the Third Parties Act gives the third party the right to enforce a
contractual term in two situations: first, when the contract expressly provides that
88 Moreover, the precise circumstances in which the notice provision is to apply must be considered
and drafted accordingly. See Hopkinson v Towergate Financial (Group) Ltd [2018] EWCA Civ 2744 and
Triumph Controls UK Ltd v Primus International Holding Company [2019] EWHC 565.
89 See Stobart Group Ltd v Stobart [2019] EWCA Civ 1376.
46

the third party may enforce the term; and second, when the contractual term pur-
ports to confer a benefit on the third party. In the second situation, if, on the
proper construction of the contract, it appears that the contracting parties did not
intend the term to be enforceable by the third party, this right does not arise.
[218] As a result of the Nisshin Shipping case,90 if the Third Parties Act applies and
the contract is neutral on the question of whether the parties intended the third
party to have enforcement rights, then the third party will have such rights.
[219] Much depends on the intentions of the contracting parties. If they do not
wish third parties to have direct rights of enforcement, these need not arise. Alter-
natively, the contracting parties can take advantage of the Third Parties Act to give
enforcement rights to third parties while amending other rights they may have
under the Third Parties Act. Further, the contracting parties can make the third
parties’ rights contingent on adhering to other terms of the contract.
[220] The Third Parties Act gives purchasers of companies and businesses the
opportunity to create direct rights of enforcement for their directors and, in the
context of share deals, the target company and its directors. For example, a seller of
a company may agree to indemnify not only the purchaser in respect of any envi-
ronmental liabilities incurred by the target company but also the target company,
the target company’s directors, and the purchaser’s directors.
[221] The seller might also be persuaded to undertake to refrain from suing the
target company or any of its directors in connection with the preparation of the
acquisition agreement and the disclosure letter. In Macquarie Internationale Invest-
ments Ltd v. Glencore (UK) Ltd,91 a covenant not to sue the target company or any of
its directors, officers, agents, or employees on whom the seller relied before agree-
ing to any term of the acquisition agreement or authorizing any statement in the
disclosure letter, was effective to prevent a claim in negligence and breach of fidu-
ciary duty against two directors of the target company.
[222] The Third Parties Act will also be of potential use when a sub-sale is in the
contemplation of the contracting parties at the time the acquisition agreement is
entered into. The Third Parties Act could be used with a view to avoiding difficul-
ties regarding the assignment of warranties to sub-purchasers. For example, there
are questions over the extent to which sub-purchaser assignees can recover losses
for breach of warranty when the purchaser has not suffered any loss. In addition, it
is questionable whether warranties can be split when there is a sub-sale of part. Giv-
ing a sub-purchaser rights pursuant to the Third Parties Act might be a way of
avoiding these difficulties.
[223] All of these potential uses of the Third Parties Act require clear and careful
drafting. As considered above, it is the case that the third party may enforce a con-
tractual term if the term purports to confer a benefit on the third party. However,
90 Nisshin ShippingCo. Ltd v. Cleaves & Company Ltd and Others [2004] 1 All ER (Comm) 481.
91 [2008] 2 BCLC 565.
47

we saw also that if, on a proper construction of the contract, it appears that the con-
tracting parties did not intend the term to be enforceable by the third party, this
right does not arise.
3.3.5 Consideration
Types of Consideration
[224] There are three main ways in which a purchaser can finance an acquisition:
the payment of cash, the issue of shares or the issue of loan capital.
Cash
[225] Cash, deriving from a purchaser’s resources, is the most frequently used con-
sideration. Where a purchaser does not have sufficient existing cash reserves to
fund an acquisition, it will usually raise the required cash by borrowing money or by
issuing shares, or by a combination of the two. The issues that arise in this context
are discussed in the Acquisition Finance: Debt Versus Equity section, below.
[226] The cash that may be available to the purchaser from the resources of the tar-
get may be constrained by the rules on financial assistance.
[227] Until 1 October 2008, there was a general prohibition on any company or its
subsidiaries giving ‘financial assistance’ to a person acquiring that company’s
shares, whether before or at the same time as the acquisition (e.g., by way of gift,
loan, security, indemnity (other than for the indemnifier’s neglect or default), or
any other financial assistance causing a reduction of net assets by a material
extent), or after the acquisition (by way of reducing or eliminating a liability
incurred by the purchaser for the purposes of the acquisition).92
[228] Private companies wishing to provide financial assistance were, in certain
circumstances, able to perform a ‘whitewash’ procedure (including seeking
approval of the proposal from shareholders) in order for the financial assistance to
be permitted under CA85. The whitewash procedure permitted a private company
to give financial assistance for acquisitions of shares in itself, or in its direct or indi-
rect holding company, provided that the holding company was a private company
and there was no intermediate public company.
[229] Since 1 October 2008, a private company (company A), or its subsidiary (or
sub-subsidiary), has been generally permitted to provide financial assistance to a
purchaser for the acquisition of shares in company A or another private company.
The company giving the assistance need no longer undergo any whitewash proce-
dure.
[230] It should be noted that a private company still cannot give financial assis-
tance for the acquisition of shares in a public company.93
92 Section 151 Companies Act 1985 (CA85).

93 Section 678 CA06.
48

[231] Table 4 illustrates the effect of the rules on financial assistance in selected
scenarios. ‘Ltd’ indicates private company status; ‘plc’ indicates public company
status.
Table 4 Financial Assistance: When Permitted
Target Company Giving Finan- Permitted?

cial Assistance
Target Ltd Target Ltd Yes – Target Ltd is a private company
Target plc Target plc No – Target plc is a public company
Target Ltd Subsidiary Ltd Yes – Subsidiary Ltd is a private com-
pany giving assistance for the acquisi-
tion of Target Ltd, its private
company parent
Target plc Subsidiary Ltd No – Target plc is a public company
Target Ltd Subsidiary plc No – Subsidiary plc is a public
company
[232] Although private companies (and their private company subsidiaries) are no
longer prohibited from giving assistance for the acquisition of their shares or those
of their private holding companies, the applicable general company law principles
should continue to be taken into account. In particular, the transaction must be in
the best interests of the company and must not breach the rules on distributions or
otherwise constitute an illegal reduction in the capital of the company.
[233] A transfer of assets to or for the benefit of the shareholders of the company
may comprise a distribution, in which case the statutory rules on distributions must
be complied with if it is gratuitous or (broadly) at less than the lower of fair market
value and book value. Even if not a distribution, it may amount to an unlawful
reduction of capital if, as a result of the transaction, there would be a reduction in
the net assets recorded in the company’s books and that reduction exceeded the
amount of the distributable reserves of the company. The example in the following
paragraph illustrates these points.
[234] A company borrows money to fund the acquisition of a private limited com-
pany. After the acquisition has completed, the target company lends money to its
new parent to enable it to repay the borrowings. Before October 2008, this would
have constituted financial assistance under CA85. A private company would have
been able to provide this assistance by using the whitewash procedure (see para-
graph [228] above). After October 2008, a private company is able to provide the
financial assistance without having to rely on the whitewash procedure. However,
other considerations will continue to apply. If, for example, there is no prospect of
the parent company being able to repay the loan and this gives rise to an
49

impairment at the subsidiary level this could amount to an unlawful reduction of

capital, unless the amount of the impairment is covered by distributable reserves.
[235] If, instead of making a loan, the target company made a gift to its new parent
of the amount the parent had borrowed, the position would need greater scrutiny.
After October 2008, financial assistance rules that used to prohibit the making of
gifts in this situation no longer apply. Nevertheless, there are other considerations
which may apply to preclude the making of such a gift. In particular, such a gift
could be regarded as a distribution and, unless covered by distributable reserves,
would amount to an unlawful distribution.
[236] Therefore, even if no statutory prohibition on the giving of financial assis-
tance applies to the company in question, the directors may nonetheless wish to be
able to demonstrate that they have considered whether the giving of financial assis-
tance would lead to a reduction in net assets and, if so, the amount of profits avail-
able for distribution. It may be desirable to involve the auditors in a detailed review
of the distributable reserves position.
[237] In addition, and in particular if the company giving the financial assistance
is, or is at risk of becoming, insolvent (or if the financial assistance transaction
could cause it to become insolvent), the directors should consider whether the
transaction could be at risk of challenge as a ‘transaction at an undervalue’ for the
purposes of section 238 Insolvency Act 1986.
[238] The payment of a dividend by the company, either before or after it is sold,
should not give rise to the above issues provided the company has sufficient distrib-
utable reserves. However, the payment by the acquired company of a post-
acquisition dividend out of pre-acquisition profits may require the purchaser to
write down its investment in the acquired company.94
Shares
[239] While there is no reason in principle why private companies should not offer
their shares by way of consideration for an acquisition, it is clear that securities for
which there is no ready market (i.e., unlisted shares) will not normally be an attrac-
tive proposition for the seller. Also, private companies are prohibited by section
755(1) CA06 from offering shares to the public and from making an allotment or
agreeing to allot shares or debentures in the company with a view to those shares or
debentures being offered to the public. Failure to observe these restrictions would
result in the private company being compelled to re-register as a public company,
94 Under current UK GAAP, following payment of such a dividend, it is necessary for the purchasing
company to consider whether its investment in the acquired company has become impaired (See FRS
102). Under IFRS, investments in subsidiaries are accounted for in the separate accounts of the
investor at either cost or in accordance with IFRS 9. For investments accounted for at cost, the
receipt of such a dividend is an indicator under IFRS 9 that an impairment may have taken place.
For investments accounted for in accordance with IFRS 9, that standard’s rules for impairment will
always apply. However, note that unless the investment is not fully valued (only in the case when
merger relief has been applied) then there will always be an impairment as a result of paying a post-
acquisition dividend out of pre-acquisition profits.
50

unless it appears to the court that the company does not meet the requirements for
re-registration and that it is impractical or undesirable to require it to take steps to
do so, in which case the court may make a remedial order and/or an order for the
compulsory winding up of the company.
[240] The purchaser’s shareholders should consider if it is acceptable to have their
controlling position in the purchaser diluted by the seller’s holding. The purchaser
may want the seller to accept a restriction on its rights of disposal of the purchaser’s
shares for a specified period; when the purchaser is a public company, it will be par-
ticularly concerned if the seller’s holding is large enough to affect the market in the
shares if sold in its entirety.
Matters to Consider When There Is an Allotment of Shares in the Purchaser

[241] Matters to consider when there is an allotment of shares in the purchaser
include the following:
– Check sufficient authorized but unissued share capital: The constitutional docu-
ments of companies incorporated prior to October 2009 may contain limita-
tions on the issued share capital of the company. Therefore, it will be
necessary to ensure either that the limit has been removed or that sufficient
authorized but unissued shares are available. It is, however, increasingly less
common for companies to retain limits on their authorized share capital.
– Check directors’ authority to allot new shares: Under section 551 CA06, the direc-
tors of a company may not exercise any powers of a company to allot relevant
securities (which includes ordinary shares) unless authorized to do so by the
company in general meeting (by approval of an ordinary resolution) or
under the articles of association. If a further resolution granting authority
must be passed, a suitable resolution will be required.95
– Deal with prior subscription (pre-emption) rights: The articles may contain prior
subscription or pre-emption rights requiring the directors to offer any new
shares to the existing shareholders before allotting them elsewhere. If this is
the case, a shareholders’ resolution should be proposed to waive the provi-
sion or amend the articles.
– Deal with pre-emption rights on transfer: Check the articles of association or any
other constitutional documents of the purchaser for any restrictions on trans-
fer that would prevent the seller realizing its investment.
– Accountant’s report as to valuation of the consideration: When a public company
issues shares for non-cash consideration, a valuation is required under sec-
tion 593 CA06. Section 593 CA06 does not apply when the whole or part of
the consideration for the shares allotted is to be in the form of shares in
another company, provided that under the arrangement providing for the
95 Note that s. 550 CA06, which was brought into force in October 2009, allows directors of private
companies having only one class of shares to exercise any power of the company to allot shares of
that class except to the extent that they are prohibited from doing so by the company’s articles. Pri-
vate companies with more than one class of shares and public companies remain subject to the
requirement for approval by ordinary resolution or in the articles of association (s. 551 CA06).
51

allotment of new shares, it is open to all the holders of the shares in the other
company in question to take part in the ‘arrangement’. However, if the pur-
chaser is buying the business of the company, as opposed to shares, and the
consideration is in the form of shares in the public company, a valuation is
required. We should note that the prohibition against a public company issu-
ing shares otherwise than for cash unless the consideration for the allotment
has been valued does not apply to the allotment of shares in consideration of
the acquisition of all the assets and liabilities of a company, but it is unusual
that a purchaser assumes all liabilities. The valuation must be by an indepen-
dent person, being a person qualified to be an auditor to the company, and a
copy of the valuation is required to be delivered to the company and the pro-
posed allottees.
– Substantial property transactions with directors: With certain exceptions, section
190 CA06 prohibits the acquisition by a company directly or indirectly of
non-cash assets from a director of the company or of its holding company, or
from a person connected with such a director, unless the arrangement has
prior shareholder approval. A ‘non-cash asset’ would include shares of
another company. However, section 191 CA06 provides that approval will not
be necessary if the value of the non-cash asset to be acquired is less than
GBP5 000 or lies between that figure and GBP100 000 and does not exceed
10 per cent of the company’s net assets as shown in the last accounts.
– Share option schemes and convertible debt instruments: The rules of any share
option schemes must be checked to see whether they contain any restrictions
on the issue of further shares, likewise any debt instrument trust deeds.
These must be reviewed to ascertain whether they contain provisions for
adjusting the number of shares under option, or issuable upon conversion, as
a result of the dilution resulting from the proposed issue of further shares.
This is somewhat unlikely except in the case of a rights issue or a vendor plac-
ing with clawback.96 If such provisions apply, the necessary adjustment must
be calculated. This will normally involve, in the case of the option scheme, an
increase in the number of shares under option, and, in the case of the loan, a
reduction in the conversion price (the effect of such a reduction being to
increase the number of shares issuable on conversion).
– Check loan facilities and other principal contracts: These documents must be con-
sidered to ensure, for example, that no consents are required to the issue of
the shares.
[242] From a tax perspective, it may, depending on the circumstances, be advanta-
geous for the seller, if the consideration in a share acquisition is the issue of shares
by the purchaser. This is because, in that case, roll-over treatment may apply so that
the seller does not suffer an immediate tax charge.97
96 Rights issues and vendor placings are discussed below.

52

Prospectus
[243] When shares are to be offered as consideration, a prospectus will have to be

published if there is an offer of securities to the public in the UK or a request for the
admission of securities to trading on a regulated market in the UK. There are vari-
ous exemptions from the requirement to produce a prospectus.98
Loan Notes
[244] A loan note (or notes) may often be included as an alternative to cash on a
share or assets deal.
[245] From the purchaser’s point of view, loan notes have a number of advantages.
They will generally be unsecured. Further, they will have few, if any, of the normal
warranties, covenants, ‘events of default’ and other provisions typically found in
more demanding forms of security documentation. They constitute an effective
source of financing for the acquisition and, provided that the rate of interest
attached to the loan notes is lower than the rate that the purchaser would otherwise
pay on its banking facility, a cheap source of financing. Unlisted loan notes are
commonly found and as such the documentation is relatively straightforward and
the notes will be relatively simple to administer.
[246] If loan notes are to be offered to the public in the UK and there is no avail-
able exemption from the requirement to produce a prospectus,99 consideration
must be given as to whether the loan notes will be treated as transferable securities
for the purposes of section 102A of FSMA,100 and whether a prospectus is therefore
required. If transfer restrictions are included in the loan notes, no prospectus will
be required.
[247] In the context of a share acquisition, receiving consideration in the form of
loan notes issued by the purchaser may be advantageous for the seller from a tax
perspective. But this will depend on the seller’s circumstances and the terms of the
notes. For instance, an individual seller may favour loan notes because they would
allow the individual to spread the period of cash realization over several tax years
(thus allowing the individual to reduce their capital gains tax liability by reference
to several years’ worth of annual exempt amounts), while a corporate seller is
unlikely to accept loan notes as consideration, if it is able to avail itself of the
SSE.101
98See Listed Companies and the Requirement for a Prospectus, below, for further details.
99Ibid.
100 ‘Transferable security’ for the purposes of FSMA, the Listing Rules and the UK Prospectus Regula-
tion means anything that is a transferable security for the purposes of Regulation (EU) No 600/2014
as it forms part of UK domestic law by virtue of EUWA (UK MiFIR), other than money-market
instruments for the purposes of UK MiFIR which have a maturity of less than twelve months.
53

3.3.6 Allocation of Consideration on an Assets Deal and Remedies
[248] The question of apportioning the consideration between the various assets
must be addressed on an asset acquisition. As a general rule, the allocation of con-
sideration is a matter to be decided upon by the parties. Tax considerations may
play a role and, for tax purposes, certain legislative constraints are imposed in
respect of permissible allocations, generally, by providing that the amount allo-
cated must be a ‘just and reasonable’ one.102
[249] If the assets being sold include a ‘sweeper’ category (i.e., all assets other than
those specifically referred to in the agreement, but which are used in the business),
consideration should be given to allocating part of the consideration monies to
these unidentified assets, even if such allocation is only a nominal sum.
[250] This is because the courts will not order specific performance of a voluntary
agreement. However, if there is consideration of money or money’s worth, specific
performance may be an available remedy. This could be important when an asset is
crucial to the running of the business, but for some reason has been overlooked and
is not therefore specifically listed, or had any of the consideration monies allocated
to it.
3.3.7 Acquisition Finance: Debt Versus Equity
[251] Where a purchaser does not have sufficient existing cash reserves to fund an
acquisition, it will usually raise the required cash by borrowing money or issuing
shares or by a combination of the two. The key factors influencing the choice
between debt and equity will be the following:
– Cost – this is likely to be the primary consideration. The cost of debt can be
quite easily established, the main indicator being the interest rate at which
the purchaser can borrow funds. There are tax benefits to using debt finance
because interest, unlike dividends, is generally deductible from profits (sub-
ject to various rules restricting interest deductions). In recent years high lev-
els of liquidity in the debt markets has resulted in the cost of debt reaching
near record lows. The cost of equity is more difficult to determine, but will be
calculated by reference to anticipated shareholder returns.
– Existing capital and financing arrangements – a purchaser will need to consider
the current shape of its balance sheet. Chief among the considerations in this
analysis is likely to be the purchaser’s level of gearing, being the ratio of debt
to shareholder funds (essentially share capital and retained profits). An
excessive gearing ratio will dissuade potential lenders from extending funds
to the purchaser. The level of gearing that lenders will be prepared to accept
will depend on the identity of the purchaser, its industry sector and its assets.
In addition, a purchaser will need to examine its existing financing arrange-
ments (and also its articles of association) to determine whether there are any
restrictions on borrowing or on acquisitions.
54

– Potential market reaction – the purchaser will need to consider how its own
shareholders and the market generally are likely to react to an issue of equity.
Debt Finance
[252] If a purchaser decides to fund the acquisition by using debt finance, the most
common methods are to enter into a loan agreement, carry out an issue of debt
securities or use a combination of both. A combination of different types of debt
will raise issues for lenders as to where their debt ranks in relation to any other
lenders and also as to the security that will be available in relation to their particu-
lar tranche of the overall debt.
[253] The purchaser may enter into a loan agreement with a single lender or with
a group of lenders, the latter being referred to as a syndicated loan and being more
common in the context of large acquisitions. In each case, the terms of the loan
agreement will likely contain detailed restrictions on how the purchaser may oper-
ate its business during the term of the loan and financial performance parameters
within which the purchaser must remain. The loan will generally be secured against
some or all of the assets of the purchaser.
[254] The term ‘debt securities’ is a generic one referring to any form of financial
instrument used to create or acknowledge indebtedness. These could include loan
notes issued to the seller, considered in the section on Consideration, above, and
bonds, which will be marketed in the international capital markets and are often
used where large amounts of money are required.
[255] The key differences between using a syndicated loan and a bond issue are as
follows.
– Flexibility – syndicated loans are more flexible than bond issues because the
borrower can draw down on the funds as and when they are required. Accord-
ingly, a borrower may agree a syndicated loan at exchange of the acquisition
agreement and draw down the funds on closing, or not draw down at all if the
acquisition fails to proceed. It is unusual for bond issues to be conditional
and the issuer of the bonds will receive the funds and remain subject to the
repayment and coupon obligations thereon irrespective of whether the
acquisition proceeds. For this reason, it is common for a bond issue to be used
to refinance acquisition funding, rather than to fund the initial acquisition
itself.
– Repayment – syndicated loans can be made on a revolving basis with the bor-
rower having the ability to repay and redraw loans as required or, if made on
a term basis, repayment can be structured as amortizing. Bonds must usually
be repaid in their entirety on maturity.
– Publicity – a syndicated loan agreement will be confidential to the borrower
and the lenders, whereas a bond issue is a public transaction requiring a pro-
spectus.
– Covenants – a syndicated loan will impose more covenants and restrictions on
the borrower than a bond issue would; however, recent years have seen
55

increasing erosion of traditional covenant protections in loan documenta-

tion.
Equity Finance
[256] The most common methods for raising equity finance are a rights issue,
open offer, placing or vendor placing.
Rights Issues
[257] In the case of a rights issue, new shares are offered to the existing sharehold-
ers in a company pro rata to their existing holdings (a pre-emptive issue). The pro-
ceeds of the rights issue may then be used to pay for the acquisition. The method
by which the rights issue is carried out will vary. In the case of a private company,
there are only a few necessary formalities, although regard must be had to the com-
pany’s articles of association, the pre-emption rights conferred by section 561
CA06 and the prohibition on public offers by private companies contained in sec-
tion 755 CA06.
[258] In contrast, the method by which a public listed company makes a rights
issue involves a much greater degree of formality. Shareholders will normally
receive a renounceable letter of allotment, which is a tradable document of title. It
entitles the shareholder to subscribe for new shares at a discount to the prevailing
market price. They can then choose to take up their rights (and send subscription
monies to the company), or sell the right to subscribe for the shares either nil paid
or fully paid.
[259] Such an issue will usually be underwritten by the purchaser’s investment
bank or broker so that the proceeds of the issue that are to be used for the acquisi-
tion are guaranteed. Underwriting will involve the payment of commissions by the
purchaser; such commissions are based on a percentage of the proceeds of the
rights issue and will vary with the duration of the underwriting commitment.
[260] A major disadvantage of raising finance for an acquisition by means of a
rights issue is the length of time it takes for the proceeds of an issue to be collected.
It is a requirement of the Listing Rules103 that the offer to the shareholders be open
for at least ten business days, and the FCA will not allow the offer to be made until
appropriate authorities (if any) have been obtained from shareholders in general
meeting. This will increase the underwriting period (and hence the commission),
and will mean that the proceeds of the issue may not be immediately available.
[261] Owing to the speed with which many sellers wish to dispose of their compa-
nies, such a delay is often unacceptable and may mean that the purchaser will
choose to use one of the alternative methods of raising equity finance outlined
below, or will obtain some form of bridging finance.
103 Listing Rule 9.5.6R.
56

[262] Rights issues, where the new shares tend to be offered at a heavy discount to
the market price, are popular with shareholders because they provide all share-
holders with an opportunity to acquire further shares cheaply or otherwise to ben-
efit financially either by selling their rights to subscribe for the new shares or
having such rights sold on their behalf by the company and its investment bank.
Open Offer
[263] An open offer is similar to a rights issue in that it involves an offer to existing
shareholders to subscribe for new shares at a discount to the prevailing market
price, where the number of new shares offered is proportional to shareholders’
existing holdings (a pre-emptive issue). However, there are some important differ-
ences between the two. In an open offer, the entitlement to subscribe for new shares
is usually personal to the shareholder and cannot be traded. Shareholders can
therefore choose either to subscribe for some or all of the new shares they are
offered or to allow their entitlement to lapse. On a traditional open offer no
arrangements are made to sell any shares that are not taken up for the benefit of
shareholders; instead, shares which are not taken up are usually placed with (i.e.
sold to) institutional investors, and the subscription monies are paid to the com-
pany.
[264] An open offer must remain open for at least ten business days. However, the
permitted timetable for an open offer may be shorter than for a rights issue
because the offer period can run concurrently with any general meeting notice
period.104 This can save the issuer money through reduced underwriting commis-
sions and earlier receipt of the issue proceeds. Another advantage from the issuer’s
viewpoint is that the discount on shares offered by way of an open offer is usually
smaller than a typical rights issue discount. Open offers cannot be made at a dis-
count of more than 10 per cent to the middle market price of those shares at the
time of the announcement of the offer unless the company’s shareholders have
specifically approved the discount.105 Because open offers are less flexible for
shareholders, many shareholder groups expect larger equity issues to be carried
out via a rights issue rather than an open offer.
Placing
[265] A placing is an issue of shares for cash on a non-pre-emptive basis. CA06 and
guidelines issued by the investment committees of institutional investor bodies
restrict the ability of companies to raise significant sums through placings. Typi-
cally, companies cannot issue for cash more than 5 per cent of their existing issued
share capital on a non-pre-emptive basis in any one year, although sometimes they
can issue an additional 5 per cent in connection with an acquisition or specified
capital investment. Issuing further shares for cash on a non-pre-emptive basis will
require specific shareholder approval. Shares will normally be placed with large
institutional investors. Placings are usually used to finance smaller acquisitions
104 On a rights issue, provisional allotment letters can only be posted after the general meeting.
57

and, provided no shareholder approval is needed, they can generally be executed

in a few weeks or even days.
Vendor Placings
[266] In a vendor placing, the purchaser issues new shares to the seller as consid-
eration for the target but arranges with its investment bank or broker for the shares
to be sold immediately by placing them in the market. This enables the purchaser
to finance the acquisition using its own shares but with the seller receiving cash.
[267] The advantages of a vendor placing are that in the simplest cases, the pro-
ceeds can be raised in a matter of three or four days and, as the shares are not being
issued for cash, the requirement to issue shares on a pre-emptive basis does not
apply.
[268] The investment committees of institutional investor bodies have published
guidance on vendor placings. These limit the percentage of shares that can be
issued and the amount of any discount.106 Any vendor placing that involves more
than 10 per cent of the issued capital, or a discount larger than 5 per cent, must be
subject to a ‘clawback’ in favour of existing shareholders. In other words, existing
shareholders are entitled to subscribe for their pro rata share of the issue if they
wish to do so (a right of first refusal). To the extent that existing shareholders do
not exercise their claw back right, the new shares are placed in the market. The
offer must remain open for ten business days, and again, this may create difficulties
in the timing of the acquisition.
[269] However, in contrast to the procedure on a rights issue, the offer may be
made immediately without waiting for the outcome of a general meeting to
approve the acquisition, or the grant of any necessary authorities (although of
course such an offer should be conditional on these approvals and authorities
being granted). Vendor placings with a clawback offer may, nevertheless, be
unpopular with existing shareholders, because they do not have the ability to sell
the right to subscribe for the shares that they would have in the case of a rights
issue.
[270] A vendor placing will often be underwritten by the investment bank or bro-
ker concerned and this will also involve commissions being paid by the purchaser.
[271] Although the effect of a vendor placing is similar to a rights issue the dis-
count at which the shares are offered is usually lower. For vendor placings, the List-
ing Rules restrict the discount to a maximum of 10 per cent of the middle market
price of the shares at the time of announcing the terms of the offer or at the time of
agreeing the placing (as the case may be).107
106 See ‘Shareholders’ Pre-emption Rights and Vendor Placings Guidelines’. These can currently be
found on the Institutional Voting Information Service website at <www.ivis.co.uk>.
107 Listing Rule 9.5.10R. A higher discount is possible when the issuer’s shareholders have specifically
-approved the placing at that higher discount or when the issue is for cash under a pre-existing
authority to disapply s. 561 CA06: See Listing Rule 9.5.10R(3).
58

Cash Box Structures
[272] If a listed company needs to issue for cash more than 5 per cent of its existing
issued share capital typically permitted (or, if it is permitted to issue an additional 5
per cent in connection with an acquisition or specified capital investment, 10 per
cent of its existing issued share capital), it can do so by using a structure known as a
cash box placing. Essentially, using such a structure enables the company to receive
cash from investors but without having to comply with, or disapply, statutory pre-
emption rights, because the shares are technically issued in return for the acquisi-
tion of shares in a ‘cash box’ company rather than in return, for cash. Cash box
placings have become relatively common, and can be particularly useful where a
company needs to raise equity funding quickly – for example, to finance an acqui-
sition in a competitive situation.
Listed Companies and the Requirement for a Prospectus
[273] In the context of fund-raising exercises for the purposes of an acquisition, a

listed purchaser must comply with the requirements of FSMA, the Listing Rules,
the UK Prospectus Regulation, UK MAR and the DTRs.
[274] Where a company offers shares or other transferable securities to the public
in the UK, or seeks to get shares or other transferable securities admitted to trad-
ing on a regulated market in the UK, the company must publish a prospectus.
‘Regulated market’ for these purposes includes the main market of the London
Stock Exchange, but not the Alternative Investment Market (AIM), the Interna-
tional Securities Market (ISM) or the Professional Securities Market (PSM). Both
open offers of shares and rights issues will usually be offers to the public for these
purposes.
[275] There are various exemptions from the requirement to produce a prospec-
tus. If the securities will be both offered to the public and admitted to trading on a
regulated market, exemption from the prospectus requirement is required in
respect of both the offer and the admission. The main exemptions in relation to
offers to the public are:
– offers made to or directed at qualified investors only;108
– offers made to or directed at fewer than one hundred and fifty persons, other
than qualified investors, in the UK; and
– when the securities have a denomination of at least EUR100,000 (or equiva-
lent).
[276] The main exemption in relation to admission to trading is when the shares
to be issued do not, when taken with other issues made in the last twelve months,
amount to 20 per cent or more of the number of shares of the same class already
108 ‘Qualified investor’ is defined in the UK Prospectus Regulation and includes entities and persons
entities who are, on request, treated as professional clients in accordance with UK MiFIR.
59

admitted to trading on the same market.109 When securities are offered in connec-
tion with a takeover by means of an exchange offer or in connection with a merger,
a prospectus is not required if a document is published containing information
about the transaction and its impact on the issuer (a takeover exempt document).
In some circumstances, a takeover exempt document must be approved by the
FCA. At present, the UK prospectus regime does not prescribe any particular items
of information that must be included, but this may change in the future.110
[277] When a prospectus has been published, any significant new factor, material
mistake, or inaccuracy arising before the final closing of the offer or when trading
on a regulated market begins (whichever occurs later) will require publication of a
supplementary prospectus.111 A person who has agreed to buy or subscribe for
securities may withdraw their acceptance within two working days after publication
of any supplementary prospectus.112
[278] A purchaser doing a fund-raising exercise will also need to consider overseas
securities laws, including the EU Prospectus Regulation (EU) 2017/1129. These are
outside the scope of this book.
3.3.8 Completion Accounts
[279] Completion accounts are accounts of the target business drawn up on, or
shortly following, completion of an acquisition. Their purpose is to confirm the
price, or an element of the price, payable for the target or to confirm a specific
aspect of the business underlying the price, and to calculate how that price should
be adjusted as a result of variations from the assumptions underlying the deal.
[280] Completion accounts are useful in circumstances where the commercial deal
has been based on aspects of the financial condition of a business that cannot be, or
have not been, determined at the date of the agreement. This will commonly be net
assets at the completion date or profit to the completion date or a combination of
both.
[281] Completion accounts can take a number of different forms: a profit and loss
account and balance sheet, a balance sheet only, a working capital statement, a net
asset statement or a statement of the position of a specific asset, for example, stock.
In the context of an asset acquisition, a balance sheet will have to reflect the assets
being purchased only, and a profit and loss account will have to reflect the profit
attributable to those assets only.
109 Article 1(5)(a) of the UK Prospectus Regulation.

110 Articles 1(4)(f) and 1(5)(e) of the UK Prospectus Regulation. HM Treasury has power to make Regu-
lations specifying items of information that must be included as a minimum, but no such Regulations
have yet been made.
111 Article 23 of the UK Prospectus Regulation.
112 Article 23 of the UK Prospectus Regulation.
60

Advantages and Disadvantages of Using Completion Accounts
[282] Advantages of using completion accounts include the following:

– Fairness – completion accounts allow the seller and purchaser to fix a price
based on the value of the assets transferred or the profits of the business close
to the time of completion so the purchaser is not over or underpaying for the
business.
– Completion accounts are a useful means of avoiding warranty disputes. Rea-
sons for using completion accounts, and not relying on a retrospective price
adjustment by virtue of a breach of warranty claim, include the general view
that a warranty claim is altogether more hostile, the requirement that gener-
ally the purchaser would have to prove damages, and the likelihood that war-
ranty limitations would apply. A warranty claim would in essence raise many
of the same questions that completion accounts procedures seek to address
by agreement.
– Completion accounts are specifically designed, and flexible, to deal with
areas of concern rather than broad and generic as in the case of audited
accounts.
– Completion accounts are a mechanism for providing up-to-date information.
– Time may be saved in negotiations, if valuation issues are deferred until after
completion if the parties can agree the basis for preparation of the comple-
tion accounts.
[283] The disadvantages include:
– By avoiding the need to reach agreement on valuation at the outset, a whole
raft of other issues to agree on is created, the method of preparing comple-
tion accounts being one of them.
– In addition to negotiating the basis of completion account preparation,
almost inevitably there will be room for disputing the results.
– The cost of at least two sets of accountants means that it is more costly to
arrive at the price in this manner.
– The preparation of completion accounts may delay arrival at the true price.
From the seller’s perspective, this may delay the process for the purchase
price to be delivered back to the seller’s shareholders or otherwise used in
the development of the seller group.
– Transaction taxes may have to be paid on a provisional basis.113
Preparation of the Completion Accounts

[284] It is highly likely that the completion accounts will be prepared first by the
target management. We should note that as of completion, these people will be
working for the purchaser and not for the seller.
[285] It is likely that the seller’s accountants will then review this work and present
the draft accounts. These draft accounts will then be issued to the purchaser and
61

the purchaser’s accountants. They will either agree, in which case the adjusting
payment is made, or disagree, in which case months of debate ensue.
[286] If the seller and purchaser do not agree between themselves the areas at
issue, it is usual for the agreement to provide that a third set of accountants, inde-
pendent of both parties, resolve the dispute.
[287] The time limits stated for preparation and delivery should be realistic, and
this will depend on what type of accounts are being prepared, in addition to other
factors connected with the transaction. The time scale should be set by agreement
between the seller and purchaser and their respective accountants. There should
always be a fallback position so that neither party can use delay to its advantage. For
example, a clause stating that if the purchaser does not notify the seller within ten
business days of receipt of draft completion accounts that they are not accepted,
the draft accounts will be deemed to have been accepted.
[288] With regard to encouraging the seller and purchaser to reach agreement, a
clause providing for the retention of part of the purchase price pending resolution
of the completion accounts should be considered. Equally, a clause providing for
the payment of interest accruing on any under-payment of consideration (i.e., from
the purchaser), or any over-payment of consideration (i.e., from the seller), may be
a possibility.
[289] If the seller and purchaser intend the accounting treatment applied to the
completion accounts to be consistent with accounting policies adopted by the tar-
get in its latest annual accounts even if those accounting policies do not comply
with generally accepted accounting standards, this will need to be expressly
stated.114
Locked Box Approach
[290] As an alternative to completion accounts on a private disposal, sellers

increasingly prefer a locked box approach. Under a locked box arrangement, an
effective date (usually the end of the target’s last financial year) is set that predates
the completion date. The purchaser takes the risks and rewards of the business
from this date and the seller undertakes that no value has been, or will be, returned
to, or for the benefit of, the seller group (known as ‘leakage’) from the target busi-
ness since the effective date except on permitted terms. To the extent of any such
return, the purchaser is compensated pound-for-pound.
[291] The advantage of a locked box arrangement for a seller is that it obviates the
need for any post-completion adjustments to the consideration and provides cer-
tainty of price.
[292] There are three main issues with locked boxes:
114 Shafi v.Rutherford [2014] EWCA Civ 1186.
62

(1) ensuring that the effective date is defined by reference to a suitable balance
sheet date that is appropriately related to the basis of the purchaser’s valu-
ation. A purchaser would expect to see a balance sheet prepared as at that
date and to have it properly warranted;
(2) the definitions of ‘leakage’ and ‘permitted leakage’ need to be carefully
crafted, capturing in each case possible ways that value may be stripped
out of the target group and returned to the seller group either legitimately
or for which an adjustment should be made to the purchase price; and
(3) ensuring (from the purchaser’s perspective) that the recovery for leakage is
expressed as not being subject to the limits on the seller’s liability included
in the acquisition agreement.
[293] Apart from leakage to the seller group, a purchaser would also be concerned
to ensure that the business is in the same state and condition at completion as it was
at the relevant accounts date or when the acquisition deal was struck. Under a full
completion accounts process (as opposed to a locked box arrangement), which
involves an adjustment against a target net asset value, the purchaser would have
an opportunity to look at every line item in the balance sheet and thus to recover,
for example, for contingent liabilities arising or increasing since the accounts date,
adverse changes in the level of working capital or a reduction in the target group’s
assets. In order to include these kinds of matters in a locked box structure, a pur-
chaser would want to see covenants from the sellers regarding the manner in which
the target business had been conducted since the accounts date in addition to the
usual representations and warranties regarding the state of the business at signing
of the purchase agreement. The purchaser would also expect the usual covenants
regulating the conduct of the business in any gap between signing and completion
to ensure the business is carried in the ordinary course during this period.
[294] Depending on the size of the potential liability involved, pension commit-
ments may also need to be considered carefully in a locked box approach so that
responsibility for any deficit and funding commitment is borne by the right party.
Interaction of Completion Accounts with the Acquisition Agreement
[295] The acquisition agreement will contain a completion accounts clause. The
principles of the preparation of the completion accounts will be set out in a sched-
ule to the agreement.
[296] As regards the interaction of completion accounts with the warranties, it may
be that the purchaser wishes certain items in the completion accounts to be war-
ranted: for example, the adequacy of specific provisions for litigation. The seller,
however, may want there to be a carve-out from warranty liability as regards matters
that are provided for in the completion accounts to the extent so provided. A varia-
tion of this is that matters discovered after completion by the purchaser are taken
into account when the parties are agreeing the adjustment payment, thus barring
any subsequent warranty liability.
[297] When there is a gap between signing the agreement and completion, there
should be obligations on the part of the seller not to manipulate the variables. This
63

might also be relevant when there is no interval between exchange and completion.
This will take the form of a warranty that the variables have not been manipulated.
For example, if the completion accounts will be focusing on net bank debt, a busi-
ness can improve its cash position by not paying suppliers. Conversely, if focusing
on working capital, a business can invoice more quickly or use borrowings to pay off
trade creditors.
3.3.9 Merger and Acquisition Accounting
Introduction
[298] The group accounts of UK parent companies whose shares are listed on a
UK regulated market are required to be prepared under the International Finan-
cial Reporting Standards (IFRS), as adopted by the UK115 (‘UK-adopted interna-
tional accounting standards’ or UK IAS).116 Other companies have a choice as to
whether they prepare their accounts under UK GAAP or under IFRS.117
[299] Under both UK GAAP and IFRS all mergers and acquisitions are accounted
for by the acquirer using acquisition accounting (other than in certain group recon-
structions when the merger accounting method may be used).
[300] In acquisition accounting the accounts of the parties are consolidated as one,
with one party being treated as an acquirer and one as an acquiree. The acquiree’s
assets and liabilities are treated as if they have been acquired by the acquirer and
are recognized in the group accounts at fair value on the acquisition date.
Acquisition Accounting under UK GAAP
[301] Under UK GAAP, the principles of acquisition accounting118 essentially

encompass four elements. First, the identifiable net assets of the acquired compa-
nies should be included in the acquiring group’s balance sheet at their fair value as
at the date of the acquisition.119 Second, the financial results and cash flows of the
acquired companies are to be included in the profit and loss account of the acquir-
ing group from the date of acquisition. Third, any difference between the fair val-
ues of the identifiable net assets acquired and the fair value of the purchase
consideration will be accounted for as goodwill. If the latter is larger than the
115 Prior to Brexit, such UK parent companies had to apply EU-adopted IFRS. Following the Brexit
implementation period, EU-adopted IFRS as at just before the end of the implementation period
was incorporated into UK law, by virtue of the International Accounting Standards and European
Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019. Consequently,
immediately following Brexit, UK IAS was substantively identical to EU-adopted IFRS (and remains
at the time of writing). However; there is scope for divergence in the future.
116 Section 403(1) CA06. Detailed rules applying to accounts not prepared under IFRS have been
enacted as regulations under Part 15 CA06.

117 Sections 395(1) and 403(2) CA06.
118 FRS 102.19.6-24. See also s. 9 of Sch. 6 of the Accounting Regulations.
119 Section 9(2) Sch. 6 of Part 1 of the Accounting Regulations.
64

former, there is positive goodwill. When the reverse is true, there is negative good-
will. Finally, when shares are issued as part of the consideration in the context of an
acquisition, the value of the premium is credited to the share premium account in
accordance with section 610(1) CA06.
[302] However, when the conditions of section 612 CA06 are met, merger relief
will mandatorily apply. In these circumstances, section 610 CA06 does not apply
and the value of the premium cannot be transferred to the share premium account.
Instead the amount is credited to a non-statutory reserve, typically named the
‘merger reserve’.
[303] FRS 102 defines fair value ‘the amount for which an asset could be
exchanged, [or] a liability settled . . . between knowledgeable, willing parties in an
arm’s length transaction.’ Further general guidance on fair value is provided in
FRS 102.11.27-32. As such, fair value should not be affected by any changes in the
assets or liabilities that result from the particular intentions of the acquirer or from
events occurring after the acquisition. Any such changes should be dealt with as
post-acquisition items, as should the costs of the reorganization and integration of
the acquired business.120 The process of identifying and valuing the assets and
liabilities of an acquired company should be completed by the date on which the
first post-acquisition financial statements of the acquirer receive approval by the
directors. If this is not possible, provisional valuations should be made and
amended if necessary before the end of twelve months after the acquisition date.121
[304] FRS 102.22 requires companies to capitalize purchased goodwill and to
amortize it through the profit and loss account over a finite useful life. Where there
is an indicator of impairment, the goodwill’s existing balance sheet carrying value
is tested against its recoverable amount; when the carrying value is higher, the asset
will be written down. Any such loss in value will be deducted from the company’s
annual profit for the year in which the review was conducted. FRS 102.27 sets out in
more detail the principles relating to impairment reviews of goodwill. Negative
goodwill is recognized on the balance sheet and then credited to the profit and loss
in subsequent periods.
[305] Although purchased goodwill is not in itself an asset, the rationale behind
including goodwill in the assets of the acquiring group is that it is recognized as
part of a larger asset (the investment) for which the management remains account-
able. Although the inclusion of goodwill on the balance sheet as a fixed asset will
bolster a company’s net worth, the consequent amortization and possible impair-
ment will result in an expense in the profit and loss account.
Accounting for Business Combinations under IFRS
[306] IFRS 3: Business Combinations is the standard that governs the accounting for
business combinations and it allows only acquisition accounting.122
120 FRS 102.19.18.

121 FRS 102.19.19.
122 IFRS 3 para. 4.
65

[307] The main differences between acquisition accounting under IFRS and UK
GAAP relate to the recognition of intangible assets, the amortization of intangible
assets, the amortization of purchased goodwill, the treatment of negative goodwill,
the treatment of acquisition costs, accounting for contingent payments and mea-
surement of the non-controlling (minority) interest. The treatment of each of these
under IFRS is summarized below.
[308] Under IFRS, intangible assets are more likely to be recognized on an acqui-
sition than under UK GAAP. International Accounting Standard (IAS) 38 requires
intangible assets to be attributed value if they are separable (as under UK GAAP) or
if they arise from contractual or other legal rights, regardless of whether they are
transferable or separable. IFRS 3 gives examples of intangible assets, including
non-compete agreements, customer contracts, and customer relationships, lease
agreements, franchises, patented technology and internet domain names.123 Valu-
ing such assets is likely to require a significant amount of work during the acquisi-
tion process and may prove costly.
[309] An intangible asset with a finite useful life must be amortized over that life,
with annual reviews of its residual value. An intangible asset with an indefinite use-
ful life should not be amortized but should be subject to annual impairment
reviews.124 The combined effect of the recognition, amortization, and impairment
of intangible assets may mean that earnings are not enhanced in the short-term fol-
lowing the acquisition.
[310] Purchased goodwill is not amortized under IFRS, but is subject to annual
impairment testing.125 Impairment testing may involve significant extra work and
can increase volatility of earnings. Negative goodwill is immediately credited to the
profit and loss account, and is not recognized as a balance sheet item.126
[311] Under IFRS 3, acquisition costs (other than the cost of issuing equity or debt
securities, which are deducted from debt or equity respectively) must be recognized
as an expense in the period in which they are incurred (under UK GAAP such costs
are capitalized and subsumed within goodwill).
[312] Earn-out arrangements must be assessed to determine whether they are pay-
ment for the business or form part of a separate transaction. If payment is contin-
gent on the vendor’s continuing to provide services (e.g., as an employee), it is
remuneration and falls into the post-acquisition profit and loss account. (There are
a number of other tests for remuneration, but that is the main one.) Contingent
consideration is measured at fair value at the acquisition date (i.e., like a financial
derivative). Changes in this value are likely to result in income statement gains or
losses under IAS 32 and IFRS 9. Under UK GAAP, contingent consideration is gen-
erally measured on a best estimate basis and any subsequent changes in the amount
expected to be paid would result in adjustments to the goodwill figure.
123 IFRS 3 ‘Illustrative Examples’.

124 IAS 38 paras 72–117.
125 IFRS 3 paras 54 and 55.
126 IFRS 3 para. 34.
66

[313] IFRS 3 allows the non-controlling interest to be measured in one of two ways:
at its fair value or as its share of the identifiable assets and liabilities at the acquisi-
tion date. The latter option is the only one available under UK GAAP.
3.3.10 Deferred Consideration and Earn-Outs
[314] Frequently, some part of the purchase price may be payable by the purchaser
after completion. There are normally different views between seller and purchaser
as regards the value of a company. Failing agreement by negotiation, one of the
obvious ways of tackling this problem is by allowing the future performance of the
target company to determine the consideration.
Deferred Consideration
[315] The first advantage of deferred consideration is that it allows the party to
sign the agreement and proceed (with the hope that any arguments between the
parties occur later). In addition, it provides funding and it gives security, in a sense,
against warranty breach. This is by virtue of the fact that if there is further money
outstanding, the purchaser will have a right, or should indeed seek to insert such a
right in the agreement, to set off against the further consideration payable any
monies due to it under any warranty claim.
[316] The seller would normally resist the inclusion of such a clause. However, in a
sense, it is a battle which is not worth fighting because, whether there is a clause of
this type included in the agreement or not, the purchaser will, as a matter of prac-
tice, use deferred consideration as a means of settling warranty claims without
approaching the seller. It is a very useful tactical weapon for the purchaser when
arguments arise regarding warranty claims.
[317] Deferred consideration is difficult to use in connection with share consider-
ation. This is a valuation point relating to the valuation of the shares as at comple-
tion or as at a future date. The seller will want the shares to be valued as at the
future date in view of the fact that the shares may have decreased in value. However,
the purchaser will want to know at the outset the extent of the dilution of its share
capital, which the acquisition is going to cause. The purchaser does not want, effec-
tively, to promise to issue an unlimited number of shares.
Earn-Outs
[318] An earn-out is an acquisition transaction in which part only of the consider-

ation is paid on completion, with the balance being deferred and paid to the seller
over a period of time, in cash or securities, in an amount which is related to the
post-acquisition performance of the business acquired.
[319] An earn-out is most frequently encountered in the context of private com-
pany acquisitions where it is intended that the seller of shares will continue to man-
age the target company post-completion. Earn-outs are also used in the context of
asset acquisitions. The theory of the earn-out is that both seller and purchaser will
67

have a commonality of interest in the future prosperity of the business during the
earn-out period.
[320] From the perspective of the purchaser, an earn-out will substantially reduce
its risk in the sense that it will only pay the full price if the performance of the
acquired company justifies, or exceeds, original expectations.
[321] Further, it ensures the continuing involvement of individuals who are instru-
mental to the success of the company or business. In addition, the seller/manager
will enjoy a continuing sense of motivation (for the benefit of all parties) which can
otherwise diminish in circumstances in which an entrepreneur sells a business.
Clearly, having an earn-out is a greater incentive to the management in terms of
the future running of the business over the first two or three years, which can be a
difficult period. If the management do not receive all their consideration at the
outset, but have to make the business perform, this is of considerable advantage to
the purchaser.
[322] From the seller’s point of view, the key advantage is that the amount of the
consideration is, to some extent, within its control. The price will more accurately
reflect the growth potential of its business, perhaps enabling the seller to realize a
higher price than past profit levels might otherwise have warranted.
[323] However, these advantages bring concomitant disadvantages in terms of the
potential for conflicts of interest between the seller and the purchaser.
[324] It is frequently asserted that earn-outs encourage ‘short termism’; manage-
ment may run the business for short-term gain, maximizing profits at the expense
of longer-term initiatives. Worse, the seller may indulge in ‘creative accounting’,
perhaps concealing profits prior to acquisition for subsequent release within the
earn-out period. Earn-outs may also lead to short termism on the part of the pur-
chaser, which may front load capital expenditure to depress profit. Conversely the
purchaser may be unduly restricted in its ability to run, sell or add to the target
business.
[325] An earn-out also delays the integration of the business. Sometimes this is rel-
evant, sometimes it is not. If the purchaser has a similar business and it wishes to
add the two businesses together, rationalizing and integrating them, an earn-out
will make this enormously problematic.
[326] If the purchaser integrates the businesses, it will not then be able to view the
profit that the target company is actually generating and will therefore not know
whether the relevant profit targets, which actually trigger the earn-out payments,
have been met. However, if it is a stand-alone business, separate and distinct from
the purchaser’s business and the purchaser does not wish to integrate, this issue
does not arise.
[327] From a tax perspective, earn-outs (and other structures where the amount of
consideration to be received by the seller is determined by reference to events or
68

circumstances occurring after the date of the acquisition) need careful consider-
ation. The earn-out right would generally be regarded as a separate asset for capi-
tal gains tax purposes following Marren (Inspector of Taxes) v. Ingles.127 This means
that the chargeable gain of the seller on the original share or asset sale would be
computed by reference to the cash received on completion plus the market value of
the earn-out right. The valuation of this right at the time of the sale as part of the
sale proceeds may, in practice, prove very difficult. When the earn-out right crystal-
lizes, the earn-out payment would not normally adjust the proceeds from the origi-
nal sale. Instead, the seller would be treated as having disposed of the earn-out
right. This would be a separate disposal for the purpose of the taxation of capital
gains, giving rise to a further capital gain, or capital loss, depending on whether
the value originally ascribed to the right was lower or higher than the amount even-
tually received. However, if the earn-out right took the form of a contingent right
to receive shares or debentures with no cash alternative, it could be possible to
obtain roll-over treatment under section 138A TCGA, effectively deferring any
gain until the shares or debentures received pursuant to the earn-out right are dis-
posed of.
Matters for Negotiation
[328] Although there should, in general terms, be a commonality of interest

between the seller and purchaser in the continuing profitability of the acquired
business or company, there will be considerable scope for relations to become
strained unless these potential conflicts of interest are explored in advance, and
procedures are agreed by which they will be allowed for or circumvented.
[329] From the point of view of the seller, the purchaser, having ultimate control of
the acquired company or business, will usually be in a position to manipulate or
depress profitability in order to reduce the deferred consideration. The seller will
therefore require reassurance that the business will be continued in the ordinary
course and will not be wound up or sold (in whole or in part), and also that the
seller will not be dismissed from their management position (other than in circum-
stances where dismissal is justified as the only appropriate course). In addition, the
seller will be keen to ensure that there is no scope for profits to be diverted to other
parts of the purchaser’s group, for example, by means of unreasonable service fees
or management charges.
[330] At the same time, an earn-out is usually predicated on the assumption that
the seller will retain management responsibility, at least during the earn-out
period. The purchaser will therefore require reassurance that the seller will not
pursue short-term profitability at the expense of longer-term objectives. In addi-
tion, the purchaser may not wish the seller to benefit (at least in terms of the earn-
out) from any favourable financing arrangements available to group companies, or
from group services provided at better than arm’s length terms.
127 [1980] 1 WLR 983.
69

[331] The case of Porton Capital Technology Funds v. 3M UK Holdings Limited128 illus-
trates some of the conflicts and difficulties in balancing the competing expecta-
tions of purchasers and sellers that can arise in the context of earn-outs and
highlights the importance of drafting precisely the extent of the parties’ rights and
obligations, particularly during the period post-completion. The case concerned
an earn-out calculated using the net sales of the target business in 2009. The pur-
chaser terminated the relevant business in 2008, having sought and failed to
receive the consent of the seller to do so, with the result that there were no net sales
in 2009 and consequently no earn-out payment. Among other things, the court
considered whether the purchaser had breached undertakings regarding the con-
duct of the business during the earn-out period. The relevant clauses required the
purchaser to ‘diligently’ seek regulatory approval for and ‘actively’ market the tar-
get’s products, and in both cases the purchaser was found in breach of the under-
takings.
[332] In view of these potential conflicts of interest that can arise, it is essential to
provide, in precise terms, what controls the purchaser is to have and what controls
the seller is to enjoy. Clauses should be drafted that deal with the periods pre- and
post-completion restricting the purchaser from certain activities that may frustrate
the profitability of the business and requiring the purchaser to use its reasonable
endeavours post-completion to maximize the earn-out payment. The clauses
should also aim to protect the aspects of the business on which the earn-out pay-
ment is based.
[333] Equally, it is essential to provide for specific eventualities and how these are
to affect the profits taken into account for purposes of the earn-out; for example,
the question of how the calculations will be affected if there is a substantial new
injection of equity into the business by the purchaser.
3.3.11 Acquisitions and Disposals by Listed Companies129
[334] The requirements concerning acquisitions and disposals of assets by listed

companies130 and their subsidiaries are set out in the Listing Rules. If an acquisi-
tion or disposal is categorized as Class 1 or Class 2, the company must comply with
the rules in Chapter 10 of the Listing Rules. If the transaction is categorized as a
reverse takeover, the company must comply with the requirements for Class 1
transactions in Chapter 10 of the Listing Rules and, in addition, the requirements
in Listing Rule 5.6.
[335] Chapter 11 of the Listing Rules imposes certain requirements where an
acquisition or disposal involves a related party, such as a current or recent director
or substantial shareholder (or an associate of either), or another person exercising
128 [2011] EWHC 2895 (Comm).

129 Acquisitions of listed companies are dealt with below. See the section dealing with acquisitions of pub-
lic companies.
130 I.e. companies with equity securities admitted to the premium segment of the UK Main Market.
70

significant influence over the company. It is designed to prevent such persons tak-
ing advantage of their position.
[336] Class 1 transactions, reverse takeovers and related party transactions (unless
the latter are very small, are in the ordinary course of business for the listed com-
pany, or relate to certain routine matters) require prior shareholder approval. Any
agreement effecting such a transaction, therefore, must be conditional on share-
holders’ approval in general meeting. The Listing Rules specifically provide that
any agreement effecting a Class 1 transaction or, where relevant, a reverse takeover
must be conditional on such shareholder approval being obtained.
[337] A transaction is classified by assessing its size relative to that of the listed
company and its group as a whole. The comparison is made using four prescribed
percentage ratios. These are as follows:
assets: gross assets in transaction × 100

gross assets of listed company
profits: profits attributable to assets in transaction × 100

profits of listed company
consideration to market capitalization: consideration × 100

aggregate market value of ordinary shares of listed company
gross capital: gross capital of acquired company or business × 100

gross capital of listed company
[338] The gross capital ratio applies only on an acquisition of a company or busi-
ness. Special rules modifying the tests may also be applied by the FCA where the
class tests are inappropriate to a company’s activities (especially for property com-
panies or mining companies) or produce anomalous results.
[339] A transaction is categorized as Class 1 if any percentage ratio is 25 per
cent131 or more, and as a Class 2 transaction if any percentage is 5 per cent or more
but each is less than 25 per cent. A transaction is categorized as a reverse takeover
if it consists of an acquisition by a listed company of a business, company (whether
listed or unlisted) or assets when any percentage ratio is 100 per cent or more (or if
a fundamental change in the business, or a change in board or voting control of the
listed company, would result).132 If the total consideration is not subject to any
maximum and the other class tests indicate the transaction to be a Class 2 transac-
tion, or a transaction where the percentages are each less than 5 per cent, the trans-
action is treated, respectively, as a Class 1 transaction or a Class 2 transaction.
[340] Certain exceptional indemnities may also constitute Class 1 transactions.
However, indemnities customarily given in connection with sale and purchase
agreements are not considered exceptional.
131 Where the profits test is anomalous it can, in some circumstances, be disregarded or a substitute test
applied.
71

[341] Break fees payable in respect of a transaction are themselves considered a

Class 1 transaction if where the listed company is being acquired, the break fees in
aggregate exceed 1 per cent of the value of the listed company calculated by refer-
ence to the offer price; or, in any other case, 1 per cent of the market capitalization
of the listed company.133 In the context of acquisitions subject to the City Code
(generally where the target is a UK public or listed company), ‘offer-related
arrangements’, which include break fees, are no longer permitted except in very
limited circumstances.
3.4 Specialist Areas

3.4.1 Competition
[342] The principal area of competition law of concern to parties involved in an

acquisition is that of merger control, which in the UK is governed by the EA, and in
the EU by the Merger Regulation. Competition rules may also apply to specific
aspects of the deal: for example, restrictive covenants and licences of intellectual
property.
[343] Depending on its size, an acquisition agreement may qualify for investiga-
tion under UK and/or EU competition law (and, potentially, under merger control
regimes in other jurisdictions). This will have important implications for the par-
ties in terms of both the feasibility of the transaction and also the timetable and
other practical considerations.
EU Merger Control and the Merger Regulation
[344] The Merger Regulation provides the mechanism for the control of mergers
and acquisitions at the European level. The Merger Regulation applies to any ‘con-
centration’ with an ‘EU dimension’. A concentration is widely defined to cover
mergers, acquisitions of control and the creation of full-function joint ventures.
[345] Whether a transaction has an EU dimension depends on whether it satisfies
certain jurisdictional thresholds. There are two sets of thresholds. When either set
is satisfied, the deal is subject to the provisions of the Merger Regulation.
(1) Primary threshold: The Merger Regulation applies when the combined
worldwide turnover of all the undertakings concerned exceeds EUR5 000
m and each of at least two of the undertakings concerned has an EU-wide
turnover of more than EUR250 m; unless each of the undertakings con-
cerned achieves more than two-thirds of its EU-wide turnover within one
and the same Member State (the ‘two-thirds rule’).
133 The Listing Rules contain a non-exhaustive list in LR 10.2.6BG of the types of arrangements that the
FCA will consider to meet the definition of ‘break fee arrangement’.
72

(2) Alternative threshold: The Merger Regulation also applies where the com-
bined worldwide turnover of all the undertakings concerned exceeds
EUR2 500 m and each of at least two of the undertakings concerned has an
EU-wide turnover of more than EUR100 m and in each of at least three EU
Member States:
– the combined aggregate turnover of all the undertakings concerned
exceeds EUR100 m; and
– each of at least two of the undertakings concerned has an aggregate
turnover of more than EUR25 m;
– unless each of the undertakings concerned satisfies the two-thirds rule.
[346] Subject to specific exceptions,134 when the Merger Regulation applies it

gives the European Commission exclusive jurisdiction, to the exclusion of the
national competition authorities under whose regimes the transaction would oth-
erwise fall (the so-called one-stop shop). As an exception to this general rule, par-
ties can engage in pre-notification contacts with the authorities with a view to
reallocating jurisdiction between the Commission and the national competition
authorities. Procedures also exist for post-notification reallocation of cases between
the Commission and the national competition authorities. The European Commis-
sion now also encourage referrals from national competition authorities of certain
mergers that should be reviewed at the EU level, even if the authorities do not have
the power to review the case themselves.135
[347] Transactions which fall under the Merger Regulation should be notified to
the European Commission after the conclusion of the acquisition agreement, the
announcement of a public bid or the acquisition of a controlling interest. The noti-
fication can also be made at an earlier stage when the parties can demonstrate a
good faith intention to conclude an agreement (e.g., on the basis of a Memoran-
dum of Understanding or a Letter of Intent), or have announced an intention to
make a public bid. Deals falling under the Merger Regulation generally cannot be
implemented before the Commission declares them ‘compatible with the internal
market’.136 The Commission can impose fines of up to 10 per cent of the aggre-
gated turnover of companies, which intentionally or negligently breach the notifi-
cation and/or the standstill obligations.137
134 For example, when a Member State wishes to protect legitimate interests other than competition
(public security, plurality of the media, defence).
135 Commission Guidance on the application of the referral mechanism set out in Article 22 of the
Merger Regulation to certain categories of cases.

136 Except: (i) in the case of a public bid that has been notified to the European Commission, provided
that the acquirer does not exercise voting rights attached to the securities; or (ii) when the European
Commission has granted a specific derogation following a request from the parties.
137 In April 2018, the European Commission imposed a fine of EUR124.5 m on Altice for
-implementing its acquisition of PT Portugal before notification or approval by the Commission.

The Commission concluded that certain provisions of the purchase agreement resulted in Altice
acquiring the legal right to exercise decisive influence over PT Portugal, for example by granting
Altice veto rights over decisions concerning PT Portugal’s ordinary business. The Commission also
found that Altice had actually exercised decisive influence over aspects of PT Portugal’s business in
73

[348] Merger Regulation cases are dealt with by mergers units within the European
Commission’s Directorate General for Competition. The deal must be notified on
the prescribed Form CO and a considerable amount of information about the par-
ties and the transaction is required.138 The European Commission has an initial
period of a standard twenty-five working days (thirty-five working days in case the
parties offer commitments) (Phase 1) to reach one of the following decisions: to
clear the deal, to clear the deal subject to conditions, for example, structural or
behavioural commitments,139 or to launch a more in-depth investigation under
Article 6(1)(c) of the Merger Regulation (Phase 2) for a further period of a standard
ninety working days. If the parties offer commitments, this Phase 2 period is auto-
matically extended to one hundred and five working days unless the parties offer
commitments less than fifty-five working days from the start of Phase 2.140 Follow-
ing the Phase 2 investigation or ‘serious doubts’ inquiry, the European Commission
may either clear the deal (often subject to conditions) or prohibit it. In appraising
the compatibility of a concentration with the internal market, the European Com-
mission must determine whether the concentration would ‘significantly impede
effective competition, in the internal market or in a substantial part of it, in particu-
lar as a result of the creation or strengthening of a dominant position’ (the ‘SIEC’
test). In applying this test, the European Commission places considerable reliance
on the parties’ market shares. Market share figures of more than 40 to 50 per cent
are traditionally regarded as indicative of single firm dominance. The Commission
may, however, raise substantive concerns in respect of transactions with market
shares below those levels, particularly in respect of concentrated markets or where
the parties are each other’s closest competitors.
certain cases, for example by giving PT Portugal instructions on how to carry out a marketing cam-
paign and by seeking and receiving detailed commercially sensitive information about PT Portugal
outside the framework of any confidentiality agreement.
138 Concentrations under the Merger Regulation that are unlikely to raise competition concerns can be
dealt with under a simplified procedure. Notifications under this procedure require less information
than a (long) Form CO. Provided all necessary conditions are met, the Commission will then adopt a
short-form clearance decision within twenty-five working days from the date of notification, unless it
decides to instigate a more in-depth investigation of the concentration as under the normal Merger
Regulation procedure. Nevertheless, pre-notification discussions with the Commission are encour-
aged in all circumstances to agree on the extent of the information to be provided.
139 If the parties wish to secure a Phase 1 clearance by agreeing to such conditions, they must offer
-appropriate commitments no later than twenty working days following notification (in which event
the usual twenty working days Phase 1 period is extended to thirty-five working days).
140 The Phase 2 timetable may also be extended by up to twenty working days in complex cases at the
request of the parties (if requested within fifteen working days from the start of Phase 2) or, at any
time, by the Commission with the consent of the parties. Thus it would not be unusual for Phase 2
proceedings to extend to 125 working days plus Commission holidays, which can equate in total six
to seven months.
74

UK Merger Control
[349] Under the EA it is the duty of the Competition and Markets Authority
(CMA) to decide, in the course of an initial Phase 1 assessment, whether to refer a
‘qualifying merger’ for a detailed Phase 2 investigation.141
[350] Under the EA, a qualifying merger arises where two or more formerly sepa-
rate enterprises cease to be distinct and either:
(1) the turnover of the target company in the UK exceeds GBP70 m (the ‘turn-
over test’); or
(2) the merger creates or strengthens a share of supply of goods or services of
any description of 25 per cent or more in the whole or any substantial part
of the UK (the ‘share of supply test’).142
[351] The EA regime does not apply to statutorily defined water mergers, to which
a special regime under the Water Industry Act 1991 (as amended by the Enterprise
Act 2002 and the Water Act 2014) applies.143
[352] In contrast to the position under the Merger Regulation, there is currently
no system of mandatory notification of mergers and acquisitions under UK law.144
In practice, however, many transactions are notified on a voluntary basis, especially
those in which a material competition issue is involved. In many UK share purchase
141 In certain limited circumstances, the Secretary of State for Business, Energy and Industrial Strategy
(Secretary of State) may intervene in mergers which raise defined public interest considerations.
Public interest considerations are limited to considerations of national security, quality and plurality
of the media, accurate presentation of new and free expression in newspapers and the stability of the
UK financial system. Further such considerations can be defined by statutory instrument. On 11
Nov. 2020, the UK Government published the National Security and Investment Bill, to modernize
its powers to investigate and to intervene in potentially hostile foreign direct investments that threat-
ens UK national security. The National Security and Investment Act (NS&I Act) received Royal
Assent on 29 Apr. 2021. The new regime, which is expected to come into force later in 2021, will cre-
ate new powers to scrutinize and impose remedies on, or block, investments that have national secu-
rity consequences. The NS&I Act removes the public interest ground of national security from the
EA merger control regime. The other public interest grounds are unaffected.
142 In March 2018, the UK Government announced new measures to increase scrutiny of foreign
-investment in relation to national security. In relation to key parts of the military, dual-use and
advanced technology sectors, the turnover test has been lowered to GBP1 m and the share of supply
test amended so that mergers will qualify for review where the target has a 25 per cent share of sup-
ply of goods/services of a particular description in the UK (in other words, the merger no longer
needs to give rise to an increment). The NS&I Act removes these lower turnover and share of supply
intervention thresholds from the EA merger control regime.
143 Water mergers are subject to a different jurisdictional test and must be referred to Phase 2 unless the
CMA considers (after consultation with Ofwat) that the merger is not likely to prejudice Ofwat’s abil-
ity to make comparisons for the purpose of carrying out its statutory functions (such as setting price
controls on regulated water enterprises and other regulatory functions) or the prejudice in question
is outweighed by relevant customer benefits.
144 The Merger Regulation no longer applies to the UK following the expiry of the implementation
period for the UK’s exit from the EU. As the ‘one-stop-shop’ principle no longer applies in the UK,
many transactions will need to file parallel notifications in the UK and the EU.
75

agreements, UK merger clearance is made a contractual pre-condition to comple-

tion. The reason for this is that the CMA may order divestments or the unwinding/
prohibition of the merger if it reaches adverse conclusions. The CMA also has
powers while it conducts its review to impose interim measures to prevent or
unwind any action (such as the integration of the merging businesses) that might
prejudice a reference and/or impede the taking of any remedial action.145
[353] Clearance for a merger may be sought by using the formal Merger Notice
procedure. The Merger Notice requires a large amount of information about the
parties and the impact of the merger on competition. The CMA encourages parties
to make contact in advance of notification and seek advice on the Merger Notice
submission, which usually involves submitting a draft of the notification and pro-
viding responses to follow-up questions. Once the Merger Notice is accepted for-
mally as complete, the CMA has an initial period of forty working days to decide
whether to clear the merger (with or without conditions) or to refer it for a detailed
Phase 2 investigation.146
[354] At Phase 1 the task of the CMA is to determine whether there is a ‘realistic
prospect’ that the transaction will result in ‘a substantial lessening of competition’.
Subject to the Secretary of State’s involvement as mentioned above, the CMA has
sole jurisdiction to decide whether the transaction is permitted (known as ‘clear-
ance’), or referred to Phase 2.147 The Phase 2 investigation usually lasts around six
months after the transaction has been referred (see further below).
[355] The parties may, in advance of making a formal notification, seek informal
advice from the CMA in the case of a ‘good faith’ confidential transaction where
there is a genuine possibility of referral to Phase 2. The resulting advice is, however,
likely to be modest and qualified and is not binding.
[356] If a merger is referred to Phase 2, there are a number of significant conse-
quences for the transaction. The EA automatically prohibits the parties from
acquiring interests in the shares of the other, except with the consent of the CMA in
anticipated mergers, or from integrating any further in completed mergers
(although the CMA is likely to have imposed an order preventing such integration
at Phase 1 in any event). The EA requires the CMA to issue a decision within a
maximum statutory period of twenty-four weeks, extendable for a period of up to
eight weeks. The CMA may also extend either the Phase 1 or Phase 2 basic review
periods where one of the parties has not complied fully with an information request
until such time as the information is provided.
145 Financial penalties may be imposed for breaches of such measures (capped at 5 per cent of the
aggregate group worldwide turnover).
146 The period for review can be extended in certain circumstances.
147 Where the CMA is minded to refer a merger to Phase 2, it is open to accept undertakings from the
parties in lieu of a reference. Such remedies are likely to be acceptable only where the competition
issue and the remedy are reasonably clear cut. Usually it is necessary to offer structural undertakings
involving the divestment of overlapping entities; ‘behavioural undertakings’ may also be acceptable
when divestment is not appropriate, but this happens rarely due to the potential ineffectiveness of
behavioural remedies and the difficulties in monitoring them.
76

[357] Ultimately, the Phase 2 decision will determine whether, on the balance of
probabilities, the merger may be expected to result in a substantial lessening of
competition. If this is found to be the case, either acceptable remedies will be
required to solve the competition problems which have been identified or the
merger will be prohibited. These remedies may be either structural (e.g., complete
or partial divestment) or behavioural. The CMA has a statutory deadline of twelve
weeks (which may be extended by up to six weeks) following the Phase 2 review
within which to implement any remedies offered by the parties.
Restrictive Covenants
[358] In order to protect the value of any goodwill or know-how associated with the
target, the purchaser will almost invariably seek to include certain restrictive cov-
enants in the acquisition agreement. Such clauses may, for example, provide for a
period of time during which the seller agrees not to compete with the target or
restrict the territory in which the seller may compete or prohibit the solicitation by
the seller of the target’s employees.
[359] Under EU law, if such restrictions are ‘directly related’ and ‘necessary’ to the
concentration – that is to say, subordinate to the main object of the concentration
but essential to its effective implementation – they are classified as ‘ancillary restric-
tions’. Articles 6(1)(b) and 8(1) and 8(2) of the Merger Regulation provide that,
when clearance is granted, any ancillary restrictions are also cleared as an integral
part of the merger/acquisition and are not subject to separate assessment under
Articles 101 and 102 of the Treaty on the Functioning of the European Union
(2012/C 326/01) (TFEU), which relate to anti-competitive agreements and con-
duct. The European Commission’s ‘Notice on restrictions directly related and nec-
essary to concentrations’,148 which provides guidance on the type of restrictions
which will be regarded as ancillary. The notice states that an ancillary restriction is
justified only where its duration, its geographical field of application, its subject
matter and the persons subject to it do not exceed what is reasonably necessary.
When restraints are not ancillary to a concentration, they may be examined sepa-
rately under Articles 101 and 102 TFEU.
[360] In the UK, arrangements which result in mergers are excluded from the pro-
visions of the Competition Act 1998. This Act provides that ancillary restrictions
148 OJ 2005 C56/24, 5 Mar. 2005. The notice states that the Commission is not obliged to assess and
individually address ancillary restrictions in its merger decisions. Instead, companies and their legal
advisers must assess whether any such restrictions can be covered by the merger decision or require
separate assessment under Art. 101 TFEU. The Commission does, however, reserve the ability to
assess novel and unresolved questions in exceptional circumstances.
77

which are ‘directly related and necessary’ to the implementation of a merger agree-
ment are similarly excluded.149 In applying these exclusions, the CMA, in its appli-
cation of Schedule 1, generally follows the approach of the European Commission
Notice (discussed above).150
[361] Seller non-compete clauses are generally considered acceptable where their
duration does not exceed two years (when the transfer of the undertaking involves
goodwill) or three years (when the transfer includes both goodwill and know-how);
in some cases, longer periods may be justified. The geographical scope of the non-
compete clause should generally be limited to the area where the seller had estab-
lished the goods or services before the transfer and the clause should only cover
goods and services of the acquired business. Simple or exclusive licences of intellec-
tual property rights granted by the seller to the purchaser may also be classified as
ancillary restrictions. When the acquired business was formerly part of an inte-
grated group of companies, the conclusion of purchase and supply agreements
between seller and purchaser can be recognized as ancillary if these are transitional
arrangements designed to ensure continuity of supply post-acquisition. Private
equity sellers will not usually agree to non-compete clauses, although a buyer may
be able to negotiate a limited covenant in relation to named companies or regard-
ing use of proprietary information.
[362] The common law doctrine of restraint of trade may also be relevant to ancil-
lary restrictions which fall outside the Competition Act 1998 (but this will be rare).
3.4.2 Intellectual Property and Information Technology
[363] For many businesses, the IP and IT they own and use will be a key business
asset. While IP/IT will have a different level of significance in every acquisition or
disposal, it should never be overlooked, particularly in an ever-more digitized
world. A purchaser’s objective in an acquisition will be to ensure that it acquires the
right to use all IP/IT necessary to conduct the business in the same manner as the
seller prior to the sale, and to develop and expand it as contemplated by the seller.
The purchaser’s approach to achieve this objective will typically be a three-stage
approach: due diligence; the sale agreement (and related agreements); and post-
completion.
Due Diligence
[364] The key distinction in any acquisition is between IP/IT owned by the target
company or business and IP/IT used by or on behalf of that company or business
under licence or through a service agreement. The first task of the due diligence
149 Schedule 1, Part 1(1) of the Competition Act 1998.

150 The CMA was previously required under s. 60 of the Competition Act 1998 to interpret UK compe-
tition law in a manner consistent with EU competition law and have regard to any decision or state-
ment of the European Commission. Section 60A of the Act now provides that post-Brexit the CMA
will continue to be bound by an obligation to ensure no inconsistency with pre-exit EU competition
case law but that it may depart from such pre-exit EU case law where it is considered appropriate in
the light of specified circumstances.
78

exercise is to identify these categories of IP and IT. This will be volunteered by the
seller to a certain extent, and will also be obtained through the purchaser raising
enquiries.
IP/IT Owned by the Target Company or Business
[365] IP that is registered will be easier to identify than unregistered IP (such as

copyright, unregistered trademarks, unregistered designs, confidential informa-
tion and know how), and there will often be strong resistance from the seller to spe-
cifically identify or list unregistered rights because of the difficulty involved in
doing so.
[366] Companies tend to have accurate information on the registered rights that
they own or have applied for (e.g., patents, trademarks, domain names and
designs) and details of such rights can generally be obtained through searches of
online databases. These searches should at least provide the purchaser with some
reasonably accurate information relating to proprietorship, status of application/
registration, geographical spread, key dates and possible encumbrances/litigation.
As regards the question of when a purchaser should conduct searches itself and
when it should rely on information supplied by the seller, searches may be neces-
sary if unreliable or insufficient information has been provided by the seller, infor-
mation is needed at an early stage, there is an inability to secure satisfactory
warranties and/or it is necessary to verify the seller’s information on a sample basis.
[367] Identifying unregistered rights can be more difficult and for this reason
alone the exercise may not be justified (or is justified only to a limited extent). How-
ever, there are a number of industries where the principal assets are unregistered
IP, for example, technology businesses that develop and/or commercialize software,
or publishing businesses. In such cases, identification of the relevant unregistered
IP will be important.
IP/IT Used under Licence or as Part of a Service Arrangement

[368] IP (including rights in software) may be owned by third parties but used
under licence by the seller in respect of the target business (or the target company
directly). It may also be provided to the target as part of a technology service
arrangement. Again, the extent of the information obtained depends on what level
of analysis is required by the purchaser and whether the seller provides copies or
sufficient details of the relevant licence and service agreements with third parties.
[369] While there is no substitute for ensuring that the purchaser knows the full
extent of the rights and obligations of the seller or target company (as applicable),
there are certain licence terms that should normally be reviewed in every case.
These include the scope of the licence (especially if exclusive or non-exclusive), the
territory, the term, royalties, termination rights, liability provisions and indemni-
ties, the ability to sub-licence (to group members, sub-contractors or other third
parties), change of control provisions (in respect of an acquisition of shares), and
assignment restrictions (on an asset acquisition). As regards software licences,
attention should also be paid to terms dealing with maintenance of the software
79

and the ability to integrate/alter/modify the software. Additional attention should

also be paid to key IT service arrangements. For example, an IT outsourcing
arrangement (in addition to the usual commercial contract considerations) may
contain minimum revenue commitments, group-wide service and pricing arrange-
ments, specific provisions around divestments and acquisitions in the customer
group, data protection and security provisions and termination charges. The
increased use of cloud services means that many IT arrangements that would pre-
viously have been supplied through a licence are now procured ‘as a service’.
Shared IP/IT
[370] A purchaser may discover that the target company is using IP/IT that is
owned and/or used by another group company which is not being sold, or that IT
services are provided by one group company to the rest of the group.
[371] It is also not unusual for IP (including software) to be licensed to one mem-
ber of a group of companies (usually the holding company) by a third party for use
by the whole group and group-wide IT service arrangements with third parties are
common. Similarly, in an asset sale the business being sold may not be a discrete
bundle of assets that can be identified and transferred independently of the
retained business of the seller. On the disposal of part of the seller’s group, whether
by shares or assets, the purchaser must seek ways of ensuring that the target com-
pany or business to be acquired continues to have access to all of the IP/IT it needs.
Where not all of the required IP/IT is being transferred as part of the transaction,
any gaps may be filled (in whole or in part) by the purchaser. For example, the tar-
get company/business may now be able to benefit from the IP/IT arrangements of
the purchaser’s group. Alternatively, licence arrangements for post-completion use
may be agreed as part of the disposal either on a long-term or temporary basis.
Shared IP/IT which is not being transferred under the transaction may be tempo-
rarily licensed as part of a transitional services arrangement, which will come into
effect after completion for an agreed period of time. Finally, the target company/
business may need to enter into new arrangements with third-party licensors/
suppliers (e.g., where off-the-shelf software is involved). Note: the impact of the
transaction on existing group-wide IP/IT arrangements involving shared assets
should always be considered so that any issues (such as any additional fees, consents
needed to assign/sub-contract, loss of volume discounts) can be managed prior to
completion.
The Acquisition Agreement

[372] The main IP/IT issues for the acquisition agreement (assets or shares) are
defining the IP/IT being sold or transferred, dealing with the transfer (as neces-
sary) of IP/IT contracts (including licences) and agreeing warranties.
Transfer of Owned Rights
[373] To effect a transfer of the relevant IP and IT, there is an important distinc-
tion between share and asset deals. In share acquisitions all IP and IT owned by the
80

target company are acquired automatically, without the need for separate assign-
ment. Separate assignments are only required when other members of the seller’s
group (for example, an IP holding company) own IP/IT used by the target com-
pany being acquired. For the acquisition of a business, the rights owned by the busi-
ness are transferred by assignment. The approach usually taken is to have a general
‘cover all’ assignment with a separate specific identification of registered and in
some cases, material unregistered rights. With respect to trademarks, recent legis-
lative changes have meant that a transfer of the whole of an undertaking shall
include the transfer of its registered trademarks, except where there is agreement
to the contrary or circumstances clearly dictate otherwise.
[374] Stand-alone assignments of registered IP are helpful for the following rea-
sons:
– Parties: For a variety of reasons, groups sometimes hold registered IP in dif-
ferent companies from the company operating the business. A short, stand-
alone document can be used to secure the assignment from the registered
proprietor without joining it as an additional party to the main acquisition
agreement.
– Recordal: Stand-alone assignments may be suitable in some countries for fil-
ing with patent, trademark and design offices in order to record a certain
person as proprietor. Stand-alone assignments are also a useful way of ensur-
ing that business-sensitive and other confidential information contained in
the main acquisition agreement are not accessible on an IP office file. Sepa-
rately, short-form confirmatory assignments are often executed after comple-
tion in the form usually accepted by local offices.
[375] Brexit had no direct impact on IP rights that subsist or are registered as UK
rights. For those rights which are EU wide (now excluding the UK), the UK govern-
ment has legislated to protect such rights holders who did not hold equivalent UK
registered rights (so that the part of those registered EU rights that was enforceable
in the UK is preserved). With regards to registered EU trademarks and designs, the
UK Intellectual Property Office granted comparable rights for the UK automati-
cally and free of charge on 1 January 2021. Owners of pending EU applications for
trademarks or designs can, upon payment of a fee, apply for an equivalent UK
application but must do so within nine months (i.e., 30 September 2021) to pre-
serve the original filing date. Note that European Patents filed through the Euro-
pean Patents Office (EPO) are not impacted by Brexit as the EPO is not an EU
institution, unlike the European Intellectual Property Office (EUIPO) which
administers EU trademarks and registered designs. UK owners of .eu level domain
names will need to ensure that they comply with new eligibility requirements with
domain registrar EURid by 30 June 2021.
Transfer of Licensed Rights

[376] Again, in a share acquisition, licences/contracts relating to IP or IT granted
to the target company will be transferred automatically with the company unless
there are specific provisions to the contrary (such as change of control provisions).
This is not the case on a sale of assets.
81

[377] Typical transfer of contracts wording in an asset acquisition agreement

requires the seller to use reasonable endeavours to novate, assign or establish some
other arrangement (e.g., hold on trust, or sub-licence) to secure for the purchaser
the benefit of the contracts. This is not ideal for IP or IT licences/contracts. For
example, licensors and suppliers of significant IP or critical IT are often concerned
about the identity of their licensees/customers and it is not uncommon for a sale to
trigger a strong desire in the licensor or supplier to terminate the relationship,
increase charges or otherwise review the arrangements. Furthermore, if consent to
the transfer is not obtained, a purported transfer could amount to breach of con-
tract and an infringement of the licensor’s rights. There may also be issues with
proceeds of crime legislation (as copyright infringement can be a criminal offence).
[378] There exists a range of answers to the question of what should happen if the
seller is unable to transfer the contract to the purchaser by completion of the trans-
action. At one extreme, it could be argued that this is entirely the purchaser’s risk.
At the other, failure to transfer a key IP/IT asset could jeopardize the transaction or
lead to a reduction of the purchase price equal to the value of the asset. Commer-
cially, the purchaser will often accept an element of risk if the licensor’s consent is
not obtained prior to the business acquisition agreement being signed.
Warranties
[379] When negotiating IP/IT warranties the purchaser can reasonably expect that
the seller will warrant that:
– details of the registered and applied for IP necessary to operate the business
have been disclosed. Details of unregistered rights may also be required
depending on the sector in which the company or business operates;
– all renewal and maintenance fees in respect of the registered and applied for
IP have been paid;
– details of all IP licences granted to, or by, the company or business have been
disclosed and there have been no breaches of any such licences;
– the activities of the company or business do not infringe any IP owned by any
third party;
– no third party is infringing IP owned by the company or business;
– (for certain patent heavy businesses) no employee compensation claims, now
or likely in the future;
– details of all material/business-critical IT used by or on behalf of the com-
pany or business and all key IT agreements have been disclosed, and there
have been no breaches of any such agreements;
– there have been no material failures, defects, outages, breaches, viruses or
other cyberattacks in the IT used by or on behalf of the company or business
and sufficient security and back-up measures are in place; and
– the company or business has possession of, or access to, all relevant source
code.
[380] The above list is, of course, not exhaustive and specific or additional warran-
ties may be required depending on the particular transaction. For example, a com-
pany which has suffered a cyberattack may be asked for further assurances around
82

cyber-security processes and protections. Further, qualifications may often be

sought to IP/IT warranties which relate to ‘awareness’ and ‘materiality’. While the
resolution of these points will depend on the importance of the IT or IP to the deal
and the negotiating strengths of the parties, it is not uncommon for a purchaser to
concede awareness qualifications to both of the warranties relating to infringe-
ment.
[381] One issue on which there is no consensus is whether a seller can legitimately
request ‘boxing’.151 Boxing is the principle that requires the purchaser to accept
that it cannot bring an action for breach of warranty relating to an IP/IT matter,
except under the specific IP/IT warranties. The justification for this is that it is not
reasonable for there to be an agreed position on, for example, IP/IT licence and
infringement warranties only for the purchaser to obtain better warranty protec-
tion under, for example, general contract or litigation warranties. From the seller’s
perspective, overlapping or duplicative warranties should be avoided.
The Disclosure Letter
[382] Caution should be exercised before the acceptance of broad general disclo-
sures, such as a disclosure that all information that could be obtained from public
registers (such as patent, design or trademark registries), or which is in the public
domain, has been disclosed. A huge amount of information is available from
patent, design and trademark registries throughout the world, which could not be
ascertained even in a lifetime’s work. Further, IP registries in other countries are
not updated at the same rate – it can take several months for, say, changes of own-
ership to be recorded in some South American and Middle East countries. Also,
where boxing of warranties is used, boxing of disclosures will be a consideration.
Post-Completion
[383] The parties should ensure that all IP and IT assets sit with the correct
company/business post-completion. Where they do not, a ‘wrong pockets’ clause
usually enables any assets which have wrongly transferred (or failed to transfer) as a
result of the transaction to be transferred to their correct location post completion.
[384] The principal post-completion step in connection with the acquisition of IP
assets is recordal. In order to record the assignment of registered IP at the relevant
domestic or foreign registry, additional formalities will be necessary. These range
from the need for an apostille or notarization, to the completion of local law assign-
ments and payment of local official fees. These are steps commonly undertaken
post-completion by the parties’ patent and trademark agents or departments. The
issue of which party will bear the costs of effecting recordals is commonly dealt with
in the acquisition agreement.
[385] In the UK, failure to record a patent or trademark assignment within six
months of the transaction restricts the ability to recover costs and expenses in rela-
tion to any infringement procedure. The EU does not have a prescribed timetable;
151 See also the discussion of boxing of warranties at para. [113] above.
83

however, in practice, you cannot deal with the right until the assignment has been
recorded.
3.4.3 Tax
[386] From a tax perspective, the main difference between share and asset acqui-
sitions is that the purchaser inherits the target company’s tax history on a share sale
whereas assets generally transfer without any tax history. This means that, in
respect of a share acquisition, purchasers would generally want to carry out more
detailed tax due diligence and require more extensive contractual protection.
Selected due diligence points on a share sale
[387] Tax assets, in particular carried-forward losses, and relationships between

the target company and the seller’s retained group are examples of key issues which
a purchaser may wish to diligence from a tax perspective on a share sale.
Preserving Tax Losses
[388] Section 45 CTA10 allows the trading losses of a company which arose in an
accounting period beginning before 1 April 2017 to be carried forward and set
against future profits of the same trade (trading losses arising in a period begin-
ning on or after 1 April 2017 may be carried forward and set against the company’s
total profits), subject to a limit of 50 per cent of profits exceeding an annual deduc-
tions allowance of GBP5m per group. As the tax identity of the company is retained
on a share acquisition, tax losses of the target company may, subject to certain
restrictions, continue to be carried forward and set against profits generated after
the purchaser has acquired the shares in accordance with the normal rules.
[389] Accumulated losses may be seen as an asset by a purchaser who is confident
that it can turn around the fortunes of a loss-making company. However, the ben-
efits of section 45 CTA10 (and the equivalent provisions for post-1 April 2017 trad-
ing losses) are restricted by the provisions of Chapter 2 of Part 14 CTA10. The
effect of these provisions is that the right to carry forward is lost if there is a major
change in the nature or conduct of the target company’s trade within a period of
three years before, and five years after, the change of ownership which will result
from the acquisition of the target company. The purchaser may wish to seek assur-
ances from the seller that no such change has occurred or will occur before the
acquisition.
Relationship between the target company and the retained group
[390] A target company’s tax position may be impacted by its relationship with
companies in the seller’s retained group in a number of ways. For instance, the tar-
get company may be part of the seller’s value added tax (VAT) group or group pay-
ment arrangements, assets may have been transferred to the target company from
a member of the retained group on a tax neutral basis or the target company may
have received surrenders of tax losses from members of the retained group.
84

[391] As part of the due diligence process, the purchaser would want to tease out
these relationships so that appropriate contractual protection can be negotiated
and arrangements agreed to disentangle the target company from these relation-
ships. By way of example, the following paragraphs will look at VAT grouping and
the potential ramifications of an intra-group transfer of capital assets to the target
company.
[392] If the target company was a member of the seller’s VAT group, the purchaser
may wish to discuss with the seller the date from which the target company should
be removed from the VAT group. Depending on the circumstances, it may be con-
venient to agree with the seller that the target company should register for VAT on
a standalone basis at a point in time before completion. The purchaser may also
wish to agree with the seller how debts between the target company and the
remainder of the VAT group would be settled, and negotiate appropriate protec-
tions as the target company may, under the applicable VAT legislation, be jointly
and severally liable for unpaid VAT liabilities of the group.
[393] Section 171 TCGA provides that, if the relevant conditions are met, capital
assets may be transferred within a group on a tax neutral no gain/no loss basis. If a
company leaves a group within six years of an acquisition to which section 171
TCGA applied and the transferred asset is held within that company or another
company leaving the group, section 179 TCGA provides that (except, in certain cir-
cumstances, where the transferor and the transferee leave the group at the same
time) the transferred asset is deemed to be sold and immediately reacquired, at
market value, by the company which acquired the asset at the point in time at which
the company leaves the group. The effect of this deemed sale and reacquisition is
to crystallize any deferred gain (or loss) in respect of that asset.
[394] The Finance Act 2011 introduced certain changes to the treatment of such
de-grouping charges, with the result that, where a deferred gain (or loss) is crystal-
lized under section 179 TCGA as a result of a company leaving a group on a share
sale, generally that gain (or loss) is no longer treated as arising in the company
leaving the group but is instead taken into account in calculating the gain (or loss)
made by the seller on the disposal of its shares, subject to specific conditions.152
Prior to the Finance Act 2011, it was usually the company leaving the group which
was chargeable in respect of the gain (or loss) arising under section 179 TCGA.
Where a deferred gain is crystallized, the consideration received by the seller for
the sale of the shares is treated as increased by an amount equal to the gain. Where
a deferred loss is crystallized, an amount equal to the loss is treated as an allowable
deduction in calculating the seller’s gain (or loss) in respect of the sale of the shares.
Where the conditions for the SSE in Schedule 7AC TCGA (discussed below) are
met in respect of the seller’s disposal of the shares, this relief will also apply in
respect of any such increased crystallized gain (or loss) attributed to the seller.
These changes, coupled with certain other changes made by the Finance Act 2011
152 In particular, the seller must be a company which is UK tax resident or otherwise within the charge
to corporation tax on chargeable gains in respect of the sale of the shares or, if it is not, the disposal
must be one which would have qualified for the SSE in Schedule 7AC TCGA if the seller had been
such a company.
85

to Schedule 7AC TCGA, make it easier to effect pre-sale hive-downs of assets with-
out triggering a chargeable gain under section 179 TCGA when the sale occurs.
Nonetheless, it is something which a purchaser may wish to diligence.
Contractual protection
Warranties
[395] Because, in a share acquisition, the purchaser is inheriting a company with a

tax history and with all its tax liabilities preserved, it is crucial that the purchaser
seeks more extensive contractual protection from the seller than would be neces-
sary in respect of an asset acquisition. The warranties that should be sought on a
share sale can usefully be divided into three categories:
(1) the basic accounts warranty: this will require that the tax position in the
accounts is accurate;
(2) the compliance warranties: these relate to the target company’s level of
compliance with tax authority requirements and, for example, will state
that returns have been filed and correct information has been given to
HMRC; and
(3) warranties as to the future: these essentially ask whether the purchaser is
acquiring potential future problems as a result of events in the past.
[396] In respect of an asset acquisition, the purchaser does not need the protection
of extensive tax warranties and indemnities, because it does not generally inherit
the seller’s liabilities. However, it will seek a few warranties. The purchaser will want
to elicit certain disclosures from the seller, for example, details of any concessions,
or dispensations agreed with HMRC, and will also seek assurances that records are
up-to-date and accurate.
Tax Covenant
[397] In a typical case, the contractual protection in a share (but not an asset)
acquisition should also include a tax covenant which is designed to ensure that the
purchaser is protected against unexpected tax liabilities arising from pre-
completion activities of the target company. It usually provides for a pound-for-
pound payment by the seller (generally subject to negotiated limitations) and is
therefore intended to bypass the need to demonstrate traditional contractual loss.
The tax covenant may be set out in a separate document that is executed on
completion or in a schedule to the share purchase agreement that takes effect on
completion.
Share acquisitions: tax treatment of seller and purchaser

[398] A company that sells a subsidiary would normally be subject to corporation
tax on any chargeable gain that arises on the disposal of the shares, unless it can
avail itself of the SSE provided for in Schedule 7AC of TCGA. The conditions for
86

the main exemption are, broadly, that the target company is a trading company or
the holding company of a trading group and that the seller has held an interest of
10 per cent or more in the target company for a continuous period of at least twelve
months beginning not more than six years before the disposal. If the SSE applies,
any gain realized on the disposal of the shares would not be chargeable to corpo-
ration tax. Equally, any loss would not be allowable.
[399] If SSE applies, cash is likely to be the most attractive form of consideration
for a corporate seller, given that there would be no tax charge which the receipt of
non-cash consideration could help to postpone. If the consideration takes the form
of loan notes or share issued by the purchaser to the seller, hold over or roll-over
treatment may be available which could be attractive, if SSE did not apply:
– If the loan notes issued by the purchaser to the seller as consideration for the
shares in the target company constitute qualifying corporate bonds (which
would generally be the case where debt instruments are issued to a corporate
seller), the seller would be required to calculate the chargeable gain or allow-
able loss arising on the disposal, but could hold over such gain or loss until
the loan notes are disposed of.
– Where shares or loan notes that do not constitute qualifying corporate bonds
are issued to a corporate seller, the seller may benefit from roll-over treat-
ment under section 135 TCGA. In that case, the seller would be deemed not
to have disposed of its shares in the target company. Instead, the newly issued
shares or loan notes would be treated as the same asset as the shares in the
target company, and the seller would be deemed to have acquired the consid-
eration shares at the same time, and at the same price, as it acquired the
shares in the target company.
[400] Certain conditions govern the application of section 135 TCGA. These
include that the share exchange must be effected for bona fide commercial reasons
and must not form part of a scheme or arrangements of which the main purpose,
or one of the main purposes, is the avoidance of a liability to capital gains tax or
corporation tax. It is also noted that, if the SSE is applicable, it takes priority over
section 135 TCGA as well as over the hold-over treatment that may otherwise apply
in respect of qualifying corporate bonds.
[401] An individual seller would, subject to any applicable exemptions or reliefs,
be subject to capital gains tax on any chargeable gain in excess of the annual
exempt amount (GBP12 300 for the 2021/2022 tax year) arising on a disposal of
shares for cash. Where no other reliefs are available, it can, therefore, be advanta-
geous for an individual to receive the consideration at least partly in the form of
shares or loan notes so as to hold over or roll over at least part of the gain until a
later tax year in order to use more than one year’s worth of annual exempt
amounts.
– Hold-over treatment may apply, if the loan notes issued by the purchaser in
consideration for the shares in the target company constitute qualifying cor-
porate bonds (broadly, loan notes which are expressed and redeemable in
87

sterling).153 Hold-over treatment means that the seller would be required to

calculate the chargeable gain or allowable loss arising on the disposal, but
could hold over such gain or loss until the loan notes are disposed of.
– Where the consideration consists of shares or loan notes that do not consti-
tute qualifying corporate bonds, the individual seller may benefit from roll-
over treatment under section 135 TCGA, subject to certain conditions (see
paragraph [400]). In that case, the seller would be deemed not to have dis-
posed of the shares in the target company. Instead, the newly issued shares or
loan notes would be treated as the same asset as the shares in the target com-
pany, and the seller would be deemed to have acquired the consideration
shares at the same time, and at the same price, as they acquired the shares in
the target company.
[402] If an individual seller is an officer or employee of the company being sold
and owns, broadly, an interest in it of at least 5 per cent and the company is either
a trading company or the holding company of a trading group, and those criteria
were fulfilled throughout the period of two years ending with the disposal, the
seller may be eligible for business asset disposal relief, formerly called ‘entrepre-
neurs’ relief ’. If business asset disposal relief applies, any chargeable gain would be
subject to capital gains tax at the reduced rate of 10 per cent, subject to a lifetime
limit of GBP1m.154 It should also be noted that, if business asset disposal relief is
available, the individual could elect out of the hold-over or roll-over treatment dis-
cussed immediately above. Even though this may result in a tax charge before dis-
posal proceeds are received, such an election could be advantageous insofar as it
ensures taxation at the lower rate provided for by business asset disposal relief.
[403] A further relief in the form of the Enterprise Investment Scheme may be
available if the company being sold is an unquoted trading company. Shareholders
who qualify for relief under this scheme are exempt from tax on capital gains on
the sale of qualifying shares if they have held them for at least three years from the
date of issue (or, if later, the date of commencement of the qualifying trade) and all
other applicable conditions are satisfied (section 150A TCGA).
[404] From a purchaser’s perspective, while it acquires the shares at market value,
the base cost of the assets that the target company owns is generally the cost at
which they were originally acquired by the target company (or their value in March
1982). It follows that, on a subsequent arm’s length disposal of any of these assets
by the target company, corporation tax may be chargeable on the increase in value
(if any) since they were originally acquired by the company (or since March 1982).
In effect, there would be a deferred tax liability and a prudent purchaser should
consider seeking a discount on the price of the shares. The importance of this con-
sideration to the purchaser will, however, depend on its future plans for the target
company and, in particular, whether it is contemplating imminent disposals of any
153 Different definitions of the term ‘qualifying corporate bond’ apply depending on whether the seller
is a company or an individual.
154 The life-time limit used to be GBP10 m, but was reduced with effect from 6 Apr. 2020.
88

existing assets held by the company (perhaps in an attempt to rationalize the busi-
ness).
Asset acquisitions: tax treatment of seller and purchaser

[405] On an asset acquisition (in respect of which a corporate seller is assumed),
the seller will be liable to corporation tax on the sale of the business. The precise
rules pursuant to which the corporation tax charge is determined differ depending
on the types of assets sold, and this may affect the way in which a seller would ide-
ally wish to allocate the consideration between different types of assets. By way of
example, a corporate seller may wish to take into account the following points.
– The disposal of any chargeable capital assets of the business (notably land)
may give rise to a chargeable gain that would be subject to corporation tax.
So, it would be in the interest of the seller to minimize the consideration
attributed to assets with a low base cost to avoid or reduce gains that would
otherwise be subject to corporation tax – unless the seller has capital losses
which can be set against the gain or it can benefit from roll-over relief. Roll-
over relief from corporation is available under sections 152–158 TCGA on
the disposal of qualifying assets (such as land, fixed plant and machinery
and, when the trade in question was already in existence before 2002, good-
will) used in the trade where the disposal proceeds are applied in the acqui-
sition of replacement qualifying assets. The relief operates to roll the gain
into the replacement assets, thus postponing any charge to corporation tax
until they are disposed of (without themselves being replaced).
– Any profit on the disposal of trading stock will, in principle, be subject to cor-
poration tax as an income receipt. So, again, it would be in the seller’s inter-
est to minimize the consideration allocated to trading stock in view of the fact
that this will be treated as a trading receipt (unless the seller has losses to
absorb it).
– The sale of assets in respect of which capital allowances have been claimed
(such as plant and machinery) may trigger balancing charges (treated as
income receipts) if the assets are sold for more than their tax written-down
value. So, the seller may wish to allocate no more than their tax written-down
value to such assets. Similar considerations apply in respect of intangibles
fixed assets.
[406] The allocation of the consideration would, however, also have tax effects for
the purchaser, and the interests of both parties in this respect rarely dovetail. By
way of example, a corporate purchaser may wish to take into account the following
points:
– After an asset acquisition, chargeable capital assets will have a stepped-up
base cost for corporation tax purposes; broadly, their base cost will be the
amount paid for them by the purchaser. When the purchaser comes to dis-
pose of them in the future, it will be charged to tax on any increase in value,
subject to any available exemptions, allowances or reliefs. So, it would be in
the purchaser’s interest to maximize the consideration (and therefore tax
basis) attributed to capital assets most likely to be resold.
89

– In the absence of conflicting requirements, it would be in the purchaser’s

interest to minimize the consideration for land on the transfer of which any
of the transaction taxes discussed below would be payable.
– In contrast, the purchaser would wish to maximize the amount allocated to
assets in respect of which it could claim capital allowances (such as plant and
machinery) or other writing down allowances (e.g. intangible fixed assets). It
would also want to maximize the consideration allocated to trading stock
because this would be deductible as a trading expense.
[407] The parties do not have an unfettered discretion as to the allocation of con-
sideration between the various assets for tax purposes. For example, when assets
that have qualified for capital allowances are sold together with assets that have not
so qualified, a just and reasonable apportionment must be made to establish how
much of the consideration is properly attributable to the assets which have quali-
fied for capital allowances. While HMRC would generally respect the commercial
agreement on the allocation of the consideration reached between two indepen-
dent parties acting at arm’s length, it is possible that HMRC could seek to chal-
lenge the allocation, for example, if it was clearly artificial.
Transaction taxes
[408] The transfer of shares in the UK is subject to an interlinked system of two
transfer taxes, stamp duty reserve tax, which would be chargeable in respect of the
share purchase agreement (or an asset purchase agreement, to the extent that the
relevant assets included chargeable securities), and stamp duty, which would be
chargeable in respect of the stock transfer form which actually transfers the owner-
ship of the shares. As the payment of stamp duty would cancel the charge to stamp
duty reserve tax, only stamp duty would generally be paid, and this would normally
be a purchaser cost.
[409] Stamp duty is normally charged at a rate of 0.5 per cent of the purchase
price, and rounded up to the nearest multiple of GBP5. If the purchase price does
not exceed GBP1 000, no stamp duty is payable. Stamp duty should be paid and
the instrument effecting the share transfer presented to HMRC within thirty days
of completion to avoid interest and penalties. In completion accounts deals, this
often means that stamp duty will be paid on a provisional basis within the thirty-day
time limit with a later adjustment (plus interest, as necessary) once the total consid-
eration has been ascertained in accordance with the contractual mechanism.
[410] Where the assets purchased in an asset acquisition include UK land, the pur-
chaser may be liable to pay one of the UK’s three land transfer taxes.
[411] The purchase of land in England or Northern Ireland may attract stamp
duty land tax, the purchase of land in Scotland may attract land and buildings
transaction tax and the purchase of land in Wales may attract land transaction tax.
All three taxes have a progressive rate system and distinguish between residential
and non-residential property. The following paragraphs provide more detail on
the stamp duty land tax system in England and Northern Ireland by way of
example.
90

[412] For residential property in England and Northern Ireland, the applicable
rates and thresholds are usually as follows:155
Purchase Price of Property (GBP) Rate of stamp duty land tax (%)
Up to 125 000 0
Over 125 000–250 000 2
Over 250 000–925 000 5
Over 925 000–1.5 m 10
Over 1.5 m 12
[413] For non-residential or mixed use property in England and Northern Ire-
land, the applicable rates and thresholds are usually as follows:156
Purchase Price of Property Rate of stamp duty land tax (%)

Up to 150 000 0
Over 150 000–250 000 2
Over 250 000 5
[414] By way of example, if the purchase price of a residential property is GBP350

000, the purchaser will not be required to pay any stamp duty land tax on the first
GBP125 000, will pay 2 per cent on the portion between GBP125 001 and GBP250
000 and will pay 5 per cent on the portion between GBP250 001 and GBP350 000.
[415] Stamp duty land tax has to be paid and a return made within fourteen days
of the ‘effective date’ of the transaction. This is normally the date on which the
property is transferred, but may be earlier if the asset purchase agreement has been
substantially performed prior to completion. In completion accounts deals, this
normally means that stamp duty land tax would initially be paid on the basis of a
155 In light of COVID-19, the rates and thresholds were temporarily adjusted. The nil rate threshold has
been raised to GBP500 000 for the period from 8 Jul. 2020 to 30 Jun. 2021. For the period from 1
Jul. 2021 to 30 Sep. 2021, the nil rate then applies to the first GBP250 000 of consideration. There-
after, it is intended that stamp duty land tax will again be charged in accordance with the normal rate
structure. See further HMRC’s guidance for rules on the calculation of stamp duty land tax for resi-
dential properties: https://www.gov.uk/stamp-duty-land-tax/residential-property-rates.
156 See HMRC’s guidance for rules on the calculation of stamp duty land tax for non-residential and
mixed use leasehold properties: https://www.gov.uk/stamp-duty-land-tax/nonresidential-and-mixed-

use-rates
91

reasonable estimate. A further return would then be made when the consideration
has been ascertained if it is different from the initial estimate.
[416] VAT would apply in respect of an asset acquisition unless it involves the
transfer of a business as a going concern. The rate at which VAT would be charge-
able would depend on the relevant assets. While the seller would ordinarily have to
account to HMRC for any applicable VAT, the asset purchase agreement would
generally permit the seller to on-charge the VAT to the purchaser. So, VAT would
be a purchaser cost to the extent that the purchaser cannot recover it as input tax.
[417] An asset acquisition will generally be a transfer of a business as a going con-
cern if the effect of the transfer is to put the purchaser in possession of a business
which can be operated as such, and may apply to the transfer of part of a business
if that part is capable of being operated as a separate business. If it is treated as a
transfer of a business as a going concern, then the sale is neither a supply of goods
nor a supply of services for the purposes of VAT and the seller is not entitled to
charge VAT on the sale (except, in certain circumstances, in respect of any land or
buildings).
[418] VAT is not normally chargeable on a share sale.
3.4.4 Property
[419] The property aspects of corporate acquisitions tend to divide into the follow-
ing three distinct categories:
(1) due diligence;

(2) contract and warranty negotiation; and
(3) implementation of any requisite land transfers.
Some or all of these will be relevant in virtually every corporate acquisition.
Due Diligence
Investigation of Title Versus Certificates of Title
[420] The most important single question to be addressed in property due dili-
gence is whether or not it can be demonstrated that the target company or business
has a good and marketable title to its property assets. There are also, however, a
considerable number of subsidiary questions that may be just as significant,
depending on the nature of the business and the intentions of the purchaser. These
questions include: Is the current use lawful in planning terms? Are there any fetters
(e.g., through restrictive covenants, etc.) on use or future expansion? Is any right or
benefit enjoyed by the property personal to the seller? Are third-party consents
required to transfer the properties? Are there any contingent liabilities in respect of
properties no longer used by the target company?
[421] Traditionally, a purchaser would be satisfied with regard to these matters by
a formal investigation of title. The respective lawyers would behave as if they were
92

acting on an individual property transaction, and the purchaser’s lawyers would go

through the same procedures and enquiries as they would on such an individual
property transaction. However, as part of the continuing desire of sellers to control
the due diligence process (and also as a reaction to the needs of the ever-increasing
number of financial and leveraged purchasers in the market), it is now not uncom-
mon to find that the data room contains, rather than copies of the basic title deeds,
certificates of title prepared by the seller’s solicitors in relation to all (or at least, all
significant) properties included in the transaction.
[422] A certificate of title is part legal opinion and part factual report. The legal
opinion element is produced by the seller’s solicitors from a formal investigation of
title exercise. The statements of fact are derived from due diligence questionnaires
furnished by the seller’s solicitors to the relevant individuals within the seller’s
organization. A certificate of title is a formal document, its formality derived from
the fact that it is prepared by the seller’s solicitors for a person (e.g., the purchaser
and probably also its financiers) who is not a client.
[423] The advantages of certificates are:
– they provide a useful background for the seller’s due diligence exercise, in
that their preparation will almost always show any problems that exist with a
property;
– if prepared well, they ought to shorten the due diligence process;
– they provide a common reference point for dealing with the concerns of both
the purchaser and its funders; and
– they avoid duplication of work.
[424] The disadvantages of certificates are:
– from a seller’s perspective, cost. The seller will pay for work that the purchas-
er’s lawyers would otherwise do;
– a certificate covers a considerable range of issues in great detail. It may well
be that some matters covered at length in a certificate are not actually of
much importance to a particular purchaser or appropriate for a particular
property;
– from a seller’s perspective, the accuracy of the certificate of title (or at least
the information provided by the seller in the course of its preparation) may
well end up being warranted. The scope of that warranty may very well be
broader than a set of specifically negotiated contractual warranties; and
– a certificate is a negotiated document, in that it contains disclosures of fact,
and qualifications to a basic legal opinion. Therefore, considerable time can
be spent between a purchaser’s and seller’s lawyers in discussing and agree-
ing them.
[425] Adopting the more traditional approach of a simple deduction of title has
the advantage of leaving the purchaser to do such work as it wishes and often
means that time is not wasted in focusing on issues that are not relevant to the pur-
chaser. However, in circumstances in which the property element of a particular
transaction is significant, an investigation of title starting from scratch may be a
time-consuming, laborious activity. The delay experienced by both parties may not
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be of benefit to either of them. In addition, and as noted above, in circumstances in

which a purchaser is relying on third-party funding, the funders will almost cer-
tainly require a due diligence report. When this requirement is anticipated, it is
often advisable for the seller to have taken steps to prepare such a report, rather
than waiting for the purchaser to do so.
[426] Irrespective of whether certificates of title are being offered on the signifi-
cant properties in a particular transaction, there will inevitably be lesser properties,
for example, short leaseholds, properties with lesser strategic significance or of a
lesser value, in which the time and effort involved in providing a certificate are not
justified. For these types of property, the conventional approach is to deduce title in
the normal manner and to supplement the title information provided by the giving
of warranties.
Warranties
[427] As mentioned above, there are any number of issues that may be relevant to
a purchaser’s ability to use and enjoy a given facility that do not relate to strict ques-
tions of ownership. These may include any of the following:
– planning;
– restrictive covenants;
– rights and easements;
– redevelopment potential;
– physical state and condition;
– relationship with third-party landlords;
– occupation costs;
– disputes;
– notices; and
– contingent liability.
[428] It is the function of the warranty and disclosure exercise to enable the pur-
chaser to form a proper view as to any fetter on the use and enjoyment of a particu-
lar facility and the likely costs of either using it, or continuing to use it, in a
particular manner.
[429] A difficulty that often hampers the warranty process in relation to property is
the relatively technical nature of the issues that the warranties address. This often
means that the seller is not really in a position to verify with certainty the accuracy
of any particular warranty being given. Property assets are often not actively man-
aged by companies, the stance tending to be essentially reactive rather than proac-
tive. This often results in a situation in which the seller is able to say that it is not
aware of a particular problem, but not much more than that. This may leave a pur-
chaser feeling that it is under-protected in relation to property warranties. For
example, a facility could be using a particular access way quite satisfactorily but may
have no formal legal right to do so. The seller would traditionally not be concerned
with this potential problem until some difficulty with it arose. The seller due dili-
gence necessary to establish that all apparent benefits enjoyed by its real estate are
enjoyed as of right would be highly burdensome.
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[430] The seller will wish to make as wide a general disclosure against any property
warranties as possible. In particular, the seller will wish to disclose anything that
might be discovered by a reasonably prudent purchaser on carrying out an inspec-
tion and/or structural survey of the properties in question. This often presents a
difficulty to the purchaser, because the transaction may be confidential. In such cir-
cumstances, it is simply not practicable for the purchaser to have adequate oppor-
tunity to carry out physical inspections. This conflict often causes considerable
difficulties for the seller and the purchaser. The seller does not wish to give warran-
ties on the physical condition of the assets; the purchaser does not want to accept
that which it has been unable to verify; and often neither wishes to compromise
confidentiality.
Implementation
[431] It is often the case that property assets need to be moved either into or out of
a particular company within a group before a corporate disposal can take place.
This may be required for any number of reasons. In particular, the level of stamp
duty land tax has encouraged sellers and purchasers to look at property reorgani-
zations as ways of minimizing it.157
[432] The sale or letting of a building will generally trigger the need for the seller
to provide to the purchaser or tenant an Energy Performance Certificate (EPC)
containing information about the energy efficiency of the building. Although the
sale of shares in a company in which the building remains in the same company
ownership is not subject to this requirement, the sale or letting of a property asset
within a group will require an EPC. Failure to provide an EPC is not a criminal
offence but may give rise to a maximum penalty of GBP5 000.
[433] Pre-disposal hive-downs present a number of particular problems; for
example, the transactions entered into will need to be registered at the Land Reg-
istry. This may mean that there is a delay in perfecting legal title by completion of
the registration of the transferee’s title. Most applications for registration can be
submitted electronically.
[434] In relation to hive-downs carried out in the period prior to a disposal, con-
cerns arise as to whether any stamp duty land tax relief applied for will be available,
on the basis either that the relevant transfer was made in contemplation of a sale,
or that arrangements were in place at the time of the disposal to sever the link in
reliance on which stamp duty land tax relief has been claimed. Moreover, even
when relief is available, if a transferee entity leaves a group within three years after
the transfer for which stamp duty land tax relief was claimed, the relief will be
clawed back.
[435] On assets transactions, significant post-completion property work is often
required. In the case of a transaction involving a large number of leaseholds, this
process may last many months, because consent from all relevant landlords will be
required. In these transactions, the particular issue that the seller and purchaser
157 Stamp duty land tax is considered in the tax section, above.
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will need to address is how they intend to deal with the individual property assets,
and the business being conducted from them, in the period between business
completion and the date on which the landlord’s consent is obtained, and a formal
transfer of the leasehold interest can occur. At one extreme, the parties may agree
to delay completion until all requisite consents have been obtained. This is prob-
ably an impractical approach, because of the effect that the limbo period will have
on the running of the business. At the other extreme, the purchaser may agree that
even when a landlord is refusing to give consent, the purchaser will accept an
assignment and deal with any proceedings that may be instigated by any dissatis-
fied landlord. More commonly, the purchaser will be allowed into occupation
pending the grant of the landlord’s consent and completion of the formal transfer.
This issue is really one that needs to be negotiated between the parties, depending
on the particular circumstances of the transaction. When the purchaser has funders
expecting to take security over the assets being acquired, the matter may rest on
their attitude to the point.
3.4.5 Environmental Aspects
[436] The main objectives in relation to the environmental aspects of a commer-

cial transaction are:
(1) to identify areas of non-compliance with environmental laws (and also any
historic contamination for which the business may be responsible);
(2) to ensure that the relevant entity has the benefit of all the permits it needs
to conduct its business, and that all such permits will be available post-
completion;
(3) to investigate whether or not any permit currently held or process cur-
rently carried out will require significant capital expenditure in order to
enable it to continue to be held or undertaken; and
(4) to seek to identify areas in which increased environmental regulation may
affect the ability of the business (either in terms of permits or cost con-
straints) to continue to operate.
[437] Once any such issues have been identified, they are, increasingly commonly,
addressed by way of price adjustment, or, in more heavily negotiated or environ-
mentally sensitive transactions, indemnity cover.
[438] Due diligence is normally a mainstay of the work carried out in relation to
environmental issues. A purchaser will expect to be able to examine copies of all
permits held by the business, all previous relevant environmental surveys and all
environmental/health and safety files maintained by the business. Depending on
the nature of the business in question, these may be too bulky and/or sensitive to be
moved from the relevant facility and may have to be inspected as part of a site visit.
Although legal due diligence is significant, a good deal of the information made
available is likely to be of a scientific/technical nature. It will probably be the case
therefore that, where resources allow, the work of the lawyers in this area will need
to be supplemented, or perhaps even led, by specialist environmental consultants.
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Certainly in relation to physical inspection and testing, the main role in these areas
would normally fall to the specialist consultant. It is important to ensure that the
scope of the review undertaken by the purchaser, the environmental lawyers and
any environmental consultants is clearly defined and understood. This is especially
important given that more sophisticated purchasers are carrying out significant
due diligence in-house rather than relying on external advisers.
[439] The main initial issue which a seller will face in preparing a business for sale
is the extent to which, if detailed environmental information (particularly in rela-
tion to known or potential contamination issues) is not available, the seller should
itself commission survey reports to provide such information. The incentive to do
this from a seller’s perspective is that the purchaser (even if it is a trade purchaser)
is often unlikely to proceed without such information, and it is time-consuming to
produce. Having good quality information available early in the process will both
speed it up, and enable the seller to quantify the level of any environmental indem-
nification that it is likely to be required to give. The disincentive for doing this work
is that purchasers will often be sceptical of work done by or on behalf of sellers. In
addition, investigative work (particularly intrusive investigative work) can be dis-
ruptive, and difficult to carry out when confidentiality is a concern. An environ-
mental lawyer will usually provide input on the environmental consultant’s
proposed scope of works and terms of appointment, and review the report from a
legal and non-technical perspective. It should be borne in mind that, in circum-
stances in which the relevant transaction does not proceed for some reason, pre-
sale investigation may leave the seller in a position in which it is obliged to disclose
such reports on subsequent disposals or, in more extreme situations, deal with a
problem that it has now identified but which was previously unknown.
[440] When the business is one which has a number of environmental sensitivities,
however, a prudent seller will often conclude that time spent on vendor environ-
mental due diligence at the beginning of a transaction will seldom, if ever, be
wasted.
[441] Different issues are likely to arise in respect of environmental issues, depend-
ing on whether the transaction is a shares or an asset sale.
Asset Sales
[442] On an asset sale:
(1) It is more likely that permits will actually need to be transferred, and in this
respect, the status of the buying entity as a fit and proper person is more
likely to be relevant.
(2) There will be a change of owner of the relevant facilities. This will mean a
potential change in the person responsible for all or some element of any
historic contamination that is present either at or near the relevant facility
or that is being caused by the current activities of the business.
(3) With possible exceptions in the United States, there will normally be no
question of the purchaser picking up historic liabilities of the business that
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are unrelated to the facilities themselves, for example, liabilities for previ-
ous off-site waste disposal by previous owners or operators of the business.
Share Sales
[443] On share sales:
(1) There will be no break in the chain of ownership. The purchaser will there-
fore need to be much less concerned with completion mechanics.
(2) To the extent that there are environmental liabilities associated with the
relevant company, then these will be unaffected by any transfer of the
shares in the company responsible for them.
(3) When the company has incurred some previous environmental liability
unconnected with the underlying business being acquired, then this will
remain with the company, for example, liabilities that the company may
have acquired in relation to any company or business that it may have pre-
viously owned or operated. This type of liability can often be more difficult
to either identify or quantify.
Indemnification/Covenant Protection
[444] To the extent that the purchaser identifies environmental risks or liabilities
that it feels are not properly reflected in the balance sheet of the relevant business,
then it will be looking for financial recompense. When such matters relate more to
a want of adequate capital expenditure or provisioning, then these may be
addressed by way of a price adjustment. When they relate to potential liabilities, the
seller will often wish to have them addressed by way of indemnity or covenant cover
rather than price adjustment. A seller will normally favour this approach for a
number of reasons:
– The giving of an indemnity or covenant will result in the headline price that
the seller is obtaining remaining unaffected. This is often very attractive to
sellers, particularly in public deals.
– When the risk is contingent (and particularly when it relates to a historic con-
tamination issue), the seller may be sceptical as to whether the issue will ever
crystallize into a liability, particularly within the time frame of the limitations
on claim that the seller may be able to negotiate into a contractual indemnity.
– In the body of an indemnity or covenant, a seller may be able to incentivize
the purchaser not to take action unless it is absolutely necessary (normally by
some cost sharing mechanism).
The Contents of an Environmental Indemnity

[445] Purchaser and seller will each have different objectives in negotiating the
terms of an environmental indemnity. The most important point to bear in mind
when approaching the negotiation of this type of agreement is that it is likely that a
number of commercial issues will only emerge once the parties begin a detailed
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negotiation of the document. It is not uncommon for parties negotiating in good

faith to believe they have reached an agreement on the terms of an indemnity, only
for significant matters of detail to continue to divide them once discussions on the
terms of the indemnity itself get underway.
[446] Of particular significance to both parties will be the precise event or series of
events that are capable of actually triggering a claim under the indemnity. The
overriding principle for the draftsman is that the trigger must be clearly and pre-
cisely defined. Is it to be tied to regulator action or to the threat of it? Is a complaint
by a third party (perhaps an adjoining owner) sufficient? Of particular sensitivity to
both seller and purchaser will often be the question of whether the purchaser can
trigger a claim if it perceives some material risk to himself or herself, to human life,
or to some other part of the environment, but when no regulator or other third
party has yet complained.
[447] In addition to the issue of the trigger event itself, the following issues are also
likely to be significant in negotiating any environmental indemnity:
– The length of time for which it is to run and the financial limits on it.
– The extent to which future conduct of the business by the purchaser will
affect its entitlement to claim, for example, should the purchaser lose its
rights to claim if the liability arises as a result of redevelopment of the site, or
a change in its use?
– Applicable law. Who should take the risk of a change in law resulting in some
new level or class of liability arising?
– Conduct of claims once they do arise.
– The class of potential beneficiaries under the indemnity. Is it to be treated as
effectively an asset of the business (and so be available if the business is
resold) or is it intended simply to support the transaction in respect of which
it came into existence?
3.4.6 Data Protection
[448] Data protection issues arise at various points during the course of an M&A
transaction. In the context of both a share sale and an asset sale, data processing
will occur during the due diligence and disclosure processes when the seller pro-
vides the prospective purchaser (or bidders) with information that may include
personal data relating to directors, employees and the personnel of suppliers and
customers of the target company and business, via a data room or otherwise. In
addition to data protection considerations arising from the conduct of the due dili-
gence process, due diligence on data protection has itself become a point of
increasing focus, in recent years. In 2020, the Information Commissioner’s Office
(ICO) fined Marriott International, Inc GBP18.4m for data protection issues
believed to have begun in 2014 at Starwood Hotels Group, which Marriott
acquired in 2016. The decision is a cautionary tale for businesses to be particularly
careful when carrying out due diligence and integrating acquired businesses.
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[449] Data protection issues at completion arise mainly in respect of asset sales,
when the personal data used in the business is transferred to the purchaser on
completion. The personal data may relate to employees or to customers or suppli-
ers who are individuals. Share sales, in which data remains with the target company
being transferred, are less likely to entail the transfer of personal data at comple-
tion, but the purchaser should assess whether it needs to retain the personal data
held by the target and, if not, it should be destroyed. Issues around marketing con-
sents may arise, particularly in asset sales. It will be important to ensure that the
right permissions are obtained before an asset sale, otherwise customer lists can be
rendered almost worthless for marketing purposes.
Legislation and Relevant Concepts
[450] Following the end of the implementation period, the General Data Protec-
tion Regulation (EU) 2016/679 as it forms part of UK domestic law by virtue of
EUWA (UK GDPR) applies in the UK, along with the Data Protection Act 2018
(together with the UK GDPR, the ‘Data Protection Legislation’). For now, the UK
and EU data protection regimes are broadly aligned. However, they may diverge
over time and, in any event, both have extra-territorial reach so purchasers and
sellers may need to consider both regimes during the course of a transaction. The
Data Protection Legislation imposes stringent requirements on entities dealing
with personal data and contains a number of specific terms that are worth under-
standing:
– ‘Personal data’ is any information relating to an identified or identifiable liv-
ing individual. This definition captures business-related data as it applies to
individuals; for example, an individual’s business e-mail address, an employ-
ee’s file photo (in context), or a director’s signature on a contract. It may also
include an individual’s job title where this is sufficient to identify the particu-
lar individual (either on its own or in combination with other data). However,
the Data Protection Legislation does not apply to data that relates only to
companies.
– ‘Special category personal data’ is any information about an individual’s
racial or ethnic origin, political opinions, religious beliefs, trade union mem-
bership, physical or mental health, sexual life, or criminal (or alleged crimi-
nal) activities. Special category personal data is a subset of personal data and
is the subject of additional protections under the Data Protection Legislation.
– A ‘data subject’ is the identified or identifiable living individual to whom per-
sonal data relates.
– ‘Processing’ is broadly defined and, as a practical matter, should be viewed
essentially as any use of a data subject’s personal data. The transfer and stor-
age of personal data in an M&A process falls squarely within the definition of
‘processing’. The Data Protection Legislation applies to the processing of
personal data by an establishment of a UK controller or processor, regardless
of whether the processing takes place in the UK or not.
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– A ‘controller’ is any person (including a company) who, alone or jointly with

others, determines the purposes and means of the processing of personal
data.
– A ‘processor’ is any person (including a company) who processes personal
data on behalf of a controller (but not including employees of a controller).
[451] A seller transferring data to a potential purchaser will be a controller of per-
sonal data included within that data. The recipient potential purchaser will also be
a controller (as, having received the personal data, the recipient then determines
the purposes and means of processing the data further, for example, by disseminat-
ing it among its advisers with instructions as to its processing). Some of the third
parties involved in an M&A transaction may act as a processors of personal data,
for example, data room providers or providers of transitional services following
completion.
Key Data Protection Considerations during an M&A Transaction
[452] This section sets out the key data protection issues that sellers and purchas-
ers will need to consider during an M&A transaction.
Legal Basis for Processing
[453] The Data Protection Legislation specifies that the processing of personal
data will only be lawful if it can be justified under one of a number of specified
grounds. These grounds include where the processing: (i) is necessary for compli-
ance with a legal obligation to which the controller is subject; (ii) has been con-
sented to by the data subject; or (iii) is necessary for the purposes of the legitimate
interests pursued by the controller or by a third party (except where those interests
are overridden by the interests of the data subject).
[454] The most common M&A related situation in which processing can be justi-
fied on the grounds of a legal requirement is where employee data is being trans-
ferred to a purchaser in connection with an asset sale to which the TUPE
Regulations apply (see discussion in paragraph [457] below).
[455] Occasionally, it will be appropriate for sellers and purchasers to rely on con-
sent to justify their processing of personal data. However, in such situations, care
must be taken to ensure that the consent was fully informed, freely given and spe-
cific to each data processing operation. It is particularly difficult to demonstrate
that employee consent was freely given. The data subject will also have a right to
withdraw consent and it must be as easy to withdraw consent as to give it. Further-
more, obtaining employee and customer consent to the processing of their per-
sonal data prior to completion may well be impracticable, in part due to
confidentiality and in part due to the implications on the transaction of an
employee or customer refusing to give consent.
[456] In practice, it is therefore common for the seller and purchaser to rely on the
legitimate interest condition to justify their processing of all personal data, other
than special category personal data. This is on the basis that the transfer of data in
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connection with a sale or acquisition is necessary for their legitimate interests and
would not prejudice the rights, freedoms or legitimate interests of the affected data
subjects. However, the seller and purchaser will still need to give careful consider-
ation to the extent of the planned disclosure, as it may be more difficult to demon-
strate that the disclosure or processing is necessary for their legitimate interests in
circumstances where data could be effectively anonymized or pseudonymized (see
paragraphs [460] and [461] below for details).
[457] Special consideration is required in situations where any personal data that a
seller wishes to transfer to a purchaser contains special category personal data
(such information may, for example, be contained in personnel files). Under the
Data Protection Legislation, processing of such special category personal data is
highly restricted and, unless an exemption applies (for example, when the transfer
is required under the TUPE Regulations), the data subjects’ explicit, informed con-
sent would be necessary before it could be transferred.
Requirement to Inform Affected Data Subjects
[458] The Data Protection Legislation requires controllers to provide certain fair
processing information to affected data subjects. This information includes the
identity and contact details of the controller, the purposes of the processing and
the legal basis for the processing. The disclosure of personal data during an M&A
transaction will therefore trigger an obligation on sellers to inform relevant data
subjects of that disclosure. Purchasers may also be required to inform data subjects
that they are in receipt of that information.
[459] It will often be the case that a seller’s standard data privacy notices refer to
potential M&A transactions as one of the purposes for which personal data may be
processed. If this is not the case then full compliance with these requirements may
well be difficult during the due diligence phase, given confidentiality concerns
around a commercial transaction (particularly in relation to persons who are not in
any way involved with the transaction, such as customers and junior employees).
Sellers and purchasers whose existing data privacy notices do not cover M&A trans-
actions and who wish to avoid having to provide fair processing information to data
subjects during the early stages of a transaction should either: (i) delay the
exchange of personal data until the deal is no longer confidential; or (ii) ensure
that any data being processed is properly anonymized.
[460] The Data Protection Legislation does not apply to anonymized information,
as such information has been irreversibly modified so that it no longer relates to an
identifiable living individual and therefore falls outside the definition of personal
data. This is a high standard and sellers and purchasers who wish to rely on anony-
mization techniques to take information outside the scope of the Data Protection
Legislation should remember that redaction of personal data does not necessarily
render it anonymous. For example, data would not be anonymous if combining two
or more redacted data sets could allow the recipient of the data to identify individu-
als’ personal data.
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[461] Where disclosure of personal data prior to completion is unavoidable, and

the seller and purchaser are reluctant to provide fair processing information to
individuals during due diligence for reasons of confidentiality, mitigating steps
should be taken to lessen the likelihood of prejudice occurring. One such step is
pseudonymization, which is specifically referred to in the recitals to the UK GDPR
as having the ability to reduce risks to data subjects and helping controllers and
processors to meet their data protection obligations. Pseudonymization is the pro-
cessing of personal data in such a manner that the personal data can no longer be
attributed to a specific data subject without the use of additional information, for
example, by encrypting the personal data using a secret algorithm. Where a seller
makes use of pseudonymization techniques it will need to ensure that the addi-
tional information that can be used to identify the relevant data subjects is kept
separately and securely. Other mitigating steps sellers could take include aggregat-
ing or summarizing information about individuals and obtaining strict assurances
from the purchaser that the information will only be used to evaluate the transac-
tion and will be returned or securely destroyed if the transaction does not go ahead.
[462] At completion, the purchaser in a business or asset sale will be under a duty
to provide the affected data subjects (e.g., customers who are individuals) with fair
processing information, including the identity of the new data controller and the
period for which the personal data will be stored. It is common for the seller and
purchaser to set out responsibility for contacting such data subjects in the business
sale agreement and to agree the text of such communication to ensure it is consis-
tent with the messages contained in public announcements.
[463] A share sale is unlikely to involve any change in the identity of the controller
of the personal data at completion. As a result, there will be no requirement to pro-
vide fair processing information. The seller and purchaser should, however, con-
sider whether fair processing information is nonetheless required to enable the
processing to be fair and transparent (e.g., issues may arise if data subjects feel it is
important that they have given their data to the company as a member of a particu-
lar group).
Employee Personal Data and the TUPE Regulations
[464] As discussed in paragraphs [486]– [527] below, the TUPE Regulations will
often apply in an asset sale context and require the seller to provide the purchaser
with certain information regarding employees (including their identity) prior to
completion. The Data Protection Legislation permits any personal data or special
category personal data included within this information to be disclosed, on the
basis that such disclosure is required by law. However, if the information provided
goes beyond TUPE requirements, or if it will be provided to all bidders rather than
only the eventual purchaser, the seller will need to find another ground to justify
the processing. Where the disclosure of employees’ personal data goes beyond that
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which is required by the TUPE Regulations the relevant guidance specifies that it
should be anonymized wherever practicable.158
[465] On completion of the sale of a business as a going concern, the TUPE Regu-
lations will apply in many cases to pass employment contracts to the purchaser.
Employment records can be transferred in this situation without breaching the
Data Protection Legislation and there is no obligation for the parties to obtain the
employees’ consent to this transfer. In situations where the TUPE Regulations do
not apply, and employees are re-employed by the new employer without continuity
of employment, their records must not be transferred without their prior, explicit
consent. In all circumstances, the purchaser should review the transferred employ-
ees’ records after completion to ensure the information it retains is relevant, accu-
rate, up to date, and not excessive.159
Security of Personal Data
[466] Security of personal data must be preserved both throughout the sale pro-
cess and following completion. The Data Protection Legislation requires that orga-
nizations put in place technical and organizational measures to ensure personal
data is kept secure. Transaction parties must therefore ensure a level of security
appropriate to the harm that might result from any unauthorized or unlawful pro-
cessing or accidental loss, destruction or damage, and to the nature of the data to
be protected. In particular, strict confidentiality safeguards should also be put in
place and accepted by those who have access to data rooms.
[467] After a sale, where a purchaser is using different databases or trying to inte-
grate different systems, this will require particular attention. Care should be taken
where the sale will result in the disposal of IT assets to ensure that no personal data
is compromised during the disposal process.
Appointment of Data Processors

[468] Data processors may be involved in a share or asset sale at a number of
stages, for example, as a third-party data room provider or as a provider of transi-
tional services following completion. In these circumstances, it is important to
ensure that the data processors have been properly appointed. In particular, the
relevant controller must enter into a written data processing agreement with them
that contains the wording required by the Data Protection Legislation and provides
sufficient safeguards and guarantees. Processors are required to comply with cer-
tain obligations, including with respect to maintenance of appropriate security
standards and deletion of personal data at the end of the provision of services relat-
ing to processing.
158 ICO Employment Practice Data Protection Code 2011 version (EP Code), Part 2: Employment
-Records, Ch. 12 and ‘Disclosure of employee information under TUPE’ (June 2014). It is expected
that this guidance will be updated in due course to reflect the latest legislation.
159 EP Code, Part 2: Employment Records, Ch. 12.
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International Transfers
[469] Where any recipient of personal data during a transaction (such as the pur-
chaser, bidders or a data room provider) is based outside the UK, the seller will
need to ensure either that the jurisdiction into which any transfer of personal data
is proposed to be made has been subject to a finding of adequacy by the Secretary
of State or under Data Protection Legislation or that an approved means of transfer
or derogation from the Data Protection Legislation is available. Available deroga-
tions and approved means of transfer of personal data include: (i) obtaining all rel-
evant data subjects’ explicit, informed consent to the transfer; and/or (ii) using
standard contractual clauses approved under Data Protection Legislation. The EU
has agreed to delay imposing restrictions on the transfer of data from within the
EU to the UK for a maximum of six months following the end of the implementa-
tion period, while it assesses the adequacy of the UK data protection regime.
Depending on the outcome of the EU’s assessment, it may be necessary for the par-
ties to transactions with a European dimension to implement additional data pro-
tection safeguards.
Risks of Non-compliance
[470] The monetary penalty thresholds under the UK GDPR (including fines of
up to GBP 17.5m or 4 per cent. of an undertaking’s worldwide turnover for the
preceding financial year, whichever is the higher) and the serious reputational risks
of data privacy breaches mean that data privacy considerations are becoming
increasingly important in a deal context. More specifically, data protection issues
(including, for example, whether the purchaser will be able to use the data for mar-
keting purposes or otherwise as intended) and concerns around a target’s compli-
ance with data protection such as how vulnerable legacy systems may be to
cyberattacks, are increasingly shaping deals. These issues can introduce delays to
the planned timeline, affect the deal structure and in some cases, prevent a deal
from going ahead entirely.
3.4.7 Employment
[471] The most important distinction when considering the employment aspects
of a private acquisition is whether the transaction is by way of share sale or asset
sale. When the transfer is by way of shares, the employment position is relatively
straightforward. The position on an asset sale is far more complicated.
Share Sale
Identify the Employer

[472] When a contract of employment is made with the target company or a sub-
sidiary of that company, the entire contract will simply be transferred with the sale.
When all employees are employed in this way, it is common for the main body of
the acquisition agreement to have no provisions relating to employment.
105

[473] However, in some cases in which there is a group structure, it may be that
employees who work in the business of the target company are employed by
another member of the group. The seller could, ideally, identify all employees nec-
essary for the operation of the target company’s business in advance and transfer
their contracts of employment to the correct company. The purchaser may wish to
seek a warranty that this has been done. If it has not, tripartite novation agree-
ments with the employees may be required. When certain key employees are con-
sidered essential by the purchaser, the agreement of these employees to transfer is
sometimes a condition to completion.
[474] The TUPE Regulations do not usually apply on a share sale. However, in
some cases, it may be that the transfer of a number of employment contracts within
the seller’s group or to the purchaser (when such transfer does not happen by vir-
tue of the transfer of shares) may constitute a transfer subject to the TUPE Regu-
lations. The same may apply to any pre- or post-sale reorganization of the business
of the target company, or where the purchaser takes over the day-to-day running of
the target’s business.160
Due Diligence and Warranties
[475] The purchaser will wish to be familiar with the numbers and types of employ-
ees, standard terms and conditions, pay structures, benefits, union agreements,
redundancy terms, disputes with employees, employee taxation, absent employees,
and other employee-related matters. The contracts of senior employees and direc-
tors may require special scrutiny, particularly with regard to notice periods, restric-
tive covenants, and termination provisions, and any provisions relating to change
of control.
[476] The purchaser will probably wish to seek warranties on all of these matters,
together with compliance by the seller as regards applicable employment laws and
regulations.
Employee Relations
[477] Both seller and purchaser will need to consider whether any consultation is
required with a works council, trade union, or other staff representative body.
Practical Matters
[478] There are usually a number of practical matters to be dealt with, for
example, the transfer of employee benefits schemes, although when an entire com-
pany is being transferred, the purchaser may simply continue with existing
arrangements.
160 See ICAP Management Services Ltd v Berry [2017] EWHC 1321 (QB). The TUPE Regulations are
considered in the context of asset sales, below.
106

Data Protection
[479] The parties should be aware of the data protection laws, particularly when
providing employee information during the due diligence process.161
Redundancies
[480] A purchaser may wish to institute a redundancy programme after comple-

tion. Questions of consultation, timing, and expense must be considered.
[481] If an employer proposes to dismiss as redundant twenty or more employees
a period of ninety days or less, the employer must, under section 188 of the Trade
Union and Labour Relations (Consolidation) Act 1992 (TULR(C)A 1992), consult
with appropriate representatives as regards the proposed dismissals. Consultation
must begin in good time. When it is proposed to dismiss one hundred employees
or more at one establishment within ninety days or less, the minimum period is
forty-five days before the first of the dismissals takes effect. Otherwise, the mini-
mum period is thirty days. There is also an obligation to inform the Department
for Business, Innovation and Skills on a collective redundancy.
[482] The details of this consultation procedure and the rules relating to the elec-
tion and identify of appropriate representatives are beyond the scope of this chap-
ter. However, note that the maximum award available to employees when the
employer has failed to comply with the consultation requirements is ninety days’
pay per employee.
[483] An employee dismissed by reason of redundancy will be entitled to a statu-
tory redundancy payment. This is calculated by reference to age and length of ser-
vice up to a maximum, at the time of writing, of GBP16 320. Each employee will
also be entitled to receive contractual notice of termination or, if notice is not given,
compensation for salary and benefits during the notice period.
[484] In addition, the employee may have the right to receive a contractual redun-
dancy payment under their terms of employment. A purchaser should therefore
enquire as to, and seek warranties in relation to, contractual redundancy rights.
Such rights may be set out in the terms of employment or expressly or impliedly
incorporated from a separate agreement or arrangement, for example, a redun-
dancy terms and procedures agreement made with a trade union, or by reason of a
previous course of conduct.
[485] On an individual level, the purchaser must ensure that each dismissal is car-
ried out fairly. A successful claim for unfair dismissal in a redundancy situation
could lead to a claim, in addition to the redundancy payment, for a compensatory
award of up to a maximum, at the time of writing, of GBP89 493 (or fifty-two weeks’
pay, if lower). Note that there is no cap on compensation when discrimination has
taken place.
161 See the section on data protection, above.
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Asset Sale162
Transfer of Undertakings (Protection of Employment) Regulations 2006
[486] The most pressing concerns for both purchaser and seller on an asset sale
usually arise from the TUPE Regulations.
[487] The TUPE Regulations implement Council Directive 2001/23 EC, known as
the ‘Acquired Rights Directive’. Their provisions are therefore similar to, but not
identical to, regulations in other jurisdictions in the EU.
[488] Although TUPE was historically enacted in order to implement the Acquired
Rights Directive, it continues to apply post-Brexit. There has been some suggestion
that the UK government may look to make some changes to certain aspects of
TUPE in due course, for example, in relation to the restriction on changing terms
and conditions (see paragraphs [504]-[507] below). At the time of writing, no firm
proposals have yet been announced.
A Relevant Transfer
[489] The TUPE Regulations apply to a transfer of an undertaking or part of an
undertaking situated in the UK or when there is a ‘service provision change’. These
two categories of transfer are not mutually exclusive but are together referred to in
this section as a ‘relevant transfer’. The TUPE Regulations refer to ‘transferor’ and
‘transferee’, because they apply to transfers other than sales, for example, the
transfer of a contract in a contracting-out situation. For ease of reference, however,
this section will refer to ‘seller’ and ‘purchaser’. The relevant transfer takes place by
operation of law, and can be effected by one transaction or a series of transactions
between the parties.
[490] The first question is to decide whether there has been a relevant transfer. In
many cases, it will be clear that an undertaking is being transferred. For example,
the acquisition of customers, work in progress, and goodwill will be a strong indi-
cation that an ongoing economic entity is being transferred. A service provision
change occurs when activities cease to be carried on by one person using an orga-
nized grouping of employees that are then resumed by another person: for
example, when a client is outsourcing its activities to a contractor, bringing activi-
ties back in-house from a contractor, or when a contract is reassigned to a new con-
tractor who will provide services to the client. There can, however, be occasions
when the matter is not entirely clear.
[491] There is a body of case law on this subject at both the European and UK lev-
els. There are no hard and fast rules as to the emphasis to be placed on certain ele-
ments of a transfer, and this will vary depending on the nature of the business. In a
very labour-intensive, highly skilled business, for example, the transfer of the
162 Note that issues raised above in the sections which consider due diligence and warranties, employee
relations, practical matters, data protection and redundancies must also be considered by the seller
and purchaser in the context of an asset sale.
108

employees alone could amount to the transfer of an undertaking. In another situ-

ation, however, the transfer of customer contracts or a significant transfer of other
assets may be necessary in order for there to be a relevant transfer. If there is any
doubt as to whether there is a transfer, it is usually safer to assume that the TUPE
Regulations do apply or, at least, to apportion liability in the acquisition agreement
in case an employment tribunal does not agree with the conclusion reached by the
parties.
Effect of a Transfer on the Contracts of Employment
[492] When a relevant transfer takes place, TUPE Regulation 4 provides that the
contract of employment of any person employed in the undertaking, or the part
transferred, will have effect after the transfer as if originally made between the per-
son so employed and the purchaser. The identity of the individual’s legal employer
will not be a significant factor. If, for example, employees are employed by a service
company that is not being transferred but those employees actually work wholly or
mainly in that part of the business being transferred, and are permanently
assigned to that part of the business, then the TUPE Regulations will apply to
transfer the contracts of employment of those employees.163
[493] The only exception to this general rule is when an affected employee
informs the seller or purchaser that they object to becoming employed by the pur-
chaser. The employment of that employee will then be terminated. That termina-
tion is not treated as a dismissal by the seller or the purchaser and therefore ought
not to give rise to any liability on their part unless the transfer involves a substantial
change in working conditions to the material detriment of the employee, or there
is otherwise a repudiatory breach of the contract by the employer, in which case, it
will be treated as a dismissal.
[494] All rights, powers, obligations, and liabilities under or in connection with
each contract of employment (with the exception of criminal liabilities) are trans-
ferred to the purchaser. This means that anything done by the seller in respect of
each contract of employment before the transfer is completed is deemed to have
been done by the purchaser.
[495] The TUPE Regulations cover not only those employed in the undertaking
(or part) or any person who is assigned to the organized grouping of resources or
employees immediately before the transfer, but also extend to any employee who
would have been employed immediately before the transfer had they not been
unfairly dismissed prior to it by reason of the transfer.
[496] Each employee’s continuity of employment is preserved by the transfer so
that the purchaser acquires the staff with their accrued continuous service for statu-
tory purposes, as well as with their existing contractual rights. All contractual rights
transfer, and benefits will need to be replicated. In practical terms, when the pur-
chaser is not able to provide exactly the same benefits, it should provide benefits as
close or equivalent as possible.
163 Albron Catering BV v FNV Bondgenoten [2011] ICRT 373
109

[497] The only elements of the employment contract that are not transferred are
provisions relating to occupational pension schemes that relate to old age, invalid-
ity, or survivors’ benefits, although a minimum level of replacement benefit must
be provided (see below). Terms relating to group personal pension schemes and
stakeholder schemes will be transferred to the purchaser as will schemes providing
only death in service benefits.164 It should also be assumed that benefits on early
retirement, for example, by reason of redundancy, will transfer to the purchaser.
Union Recognition
[498] Collective agreements in place between the seller and a recognized trade
union transfer automatically under the TUPE Regulations. However, case law and
amendments to the TUPE Regulations have confirmed that the purchaser will not
be bound by any changes to collective agreements which are agreed after the date
of the transfer, if the purchaser does not participate in the collective bargaining for
those changes. In those circumstances, any contractual term which purports to
incorporate terms of collective agreements as may be agreed from time to time has
no effect in relation to post-transfer changes.
[499] Similarly, if a trade union is recognized by the seller, it will automatically be
recognized by the purchaser on completion (unless the undertaking ceases to
retain a distinct identity within the purchaser’s organization). Recognition agree-
ments and collective bargaining agreements are not normally legally enforceable
under English law. However, in practice, de-recognition or failure to adhere to a
collective agreement would be likely to have a highly detrimental effect on indus-
trial relations.
Apportionment of Liabilities
[500] It is not possible for the parties to the transfer of an undertaking to agree
that the TUPE Regulations will not apply. However, there is nothing to prevent the
parties to an acquisition agreement agreeing to apportion liabilities between them
(e.g., by way of indemnity) having taken account of the effect of the TUPE Regula-
tions.
[501] The parties may decide, for example, that at least some of the liabilities for
the period up to completion should remain the responsibility of the seller. For
example, the parties could decide that if the seller had breached a contractual or
statutory provision in relation to an employee, then the cost of defending and/or
settling such a claim should be borne by the seller.
Identifying the Employees
[502] Another area that is sometimes covered by the acquisition agreement is a

case in which there is difficulty in deciding which employees will transfer with the
business. This concern can be a very difficult issue, particularly when the seller
164 See the section dealing with pensions, below.
110

needs to retain some staff for its business and/or when redundancies are contem-
plated.
[503] The parties could decide upon a list of employees who will be transferred
based on a rule of thumb that if an employee spends at least 50 per cent of their
time in the business that is being transferred, then the employee will transfer with
the business. However, there is a risk that an employee, or ultimately, an employ-
ment tribunal, could disagree with the allocation of employees. The parties could
therefore agree to a mechanism for, for example, offering a new contract of
employment to any employee who did not transfer under the TUPE Regulations
and/or apportioning any costs of claim.
Variation to Terms and Conditions

[504] A purchaser will often wish to harmonize the terms and conditions of its new
workforce with that of its existing workforce. However, the TUPE Regulations pre-
clude any change to terms and conditions in which the transfer is the principal rea-
son for the change, unless there is an economic, technical or organizational reason
entailing changes in the workforce (an ETO reason). A purchaser’s wish to harmo-
nize the terms and conditions of employment of the transferring employees with
its existing workforce will not count as an ETO reason. This means that even when
an employee has agreed to accept a new package, the employee may be able to
challenge the validity of a new unfavourable term (such as a restrictive covenant) at
a later date.
[505] This can cause significant problems for a purchaser. The main point is that
any change must be separate from the transfer. What will probably be required is
either the passage of time or the occurrence of a subsequent event such as a recon-
struction or reorganization to break the causal link to the transfer.
[506] The TUPE Regulations will not render a contractual change void if the terms
of that contract permit the employer to make such a variation. For example, where
there is a mobility clause in the contract, which allows the employer to change the
place of work, such a change would fall within this exception.
[507] Finally, where the provisions of a collective agreement have been incorpo-
rated into individual contracts of employment, any such incorporated contractual
provision may be varied after one year following the transfer, provided that the
employee’s contractual rights and obligations remain no less favourable overall.
Dismissals in Connection with the Transfer

[508] TUPE Regulation 7(1) states that any employee dismissed by either the
seller or purchaser before or after a relevant transfer, should be treated as having
been unfairly dismissed, if the transfer is the reason or principal reason for the dis-
missal. However, Regulation 7(1) does not apply if the dismissal is for an ETO rea-
son.
[509] The concept of ‘changes in the workforce’ for the purposes of showing an
ETO reason requires a change in the numbers or functions of affected employees.
111

It also includes a change in the location of the workforce. This effectively means
that a genuine redundancy would provide a successful defence to a claim of auto-
matically unfair dismissal under Regulation 7(1). Even if a genuine redundancy can
be established, this does not in itself make the dismissal fair; the normal tests for
fair redundancy will still have to be satisfied. Thus, the employee must be truly
redundant: alternative positions must have been considered and, if available,
offered. The employee must also not have been unfairly selected for redundancy.
For example, a purchaser may have to consider the employee alongside the exist-
ing staff before deciding who should become redundant.
[510] In addition, the redundancy must be handled fairly in terms of consultation
at both the collective and individual level. Failure to comply with consultation
requirements may render a dismissal on grounds of redundancy unfair.165
Obligation to Provide Information
[511] TUPE Regulation 11 requires the seller to give the purchaser prescribed
written information about any person employed by the seller who is assigned to the
undertaking or organized grouping of resources or employees that is the subject of
a relevant transfer as well as all the associated rights and obligations towards those
employees. This information must be provided by the seller at least twenty-eight
days before the transfer, and must be updated up to the point of transfer. The pur-
chaser may complain to an employment tribunal of any failure by the seller to pro-
vide the required information within three months after the transfer. A successful
claim could lead to compensation of at least GBP500 per employee in respect of
whom the information was not provided or was defective (TUPE Regulation 12).
Obligation to Inform and Consult on a Transfer

[512] TUPE Regulation 13 provides for both the seller and the purchaser to
inform and/or consult with representatives of their employees (whether or not
employed in the undertaking or part of the undertaking to be transferred), who
may be affected by the transfer, or may be affected by measures taken in connection
with the transfer.
[513] The information to be provided is as follows:
– the fact that the transfer is to take place;
– when, approximately, it is to take place;
– the reasons for it;
– the ‘legal, economic and social implications’ of the transfer as regards the
affected employees;
– the number of agency workers working temporarily for and under the super-
vision and direction of the employer, the parts of the employer’s undertaking
in which those agency workers are working and the type of work those agency
workers are carrying out;
165 Redundancies are discussed in the context of share sales, above.
112

– the measures that the seller envisages it will take, in connection with the
transfer, in relation to the affected employees; and
– the measures that the purchaser envisages it will take, in connection with the
transfer, in relation to the affected employees. The term ‘measures’ is not
defined in the TUPE Regulations. It will apply to matters such as redundan-
cies, changes in working conditions, shift patterns, etc. and changes to pen-
sion arrangements or other benefits. When measures are to be taken (i.e.,
almost always), consultation must take place as well as information provided.
(If no measures are envisaged, then there is still an argument that consulta-
tion may be required, for example, on the fact of the transfer itself).
[514] The purchaser must inform the seller of the measures that it intends to take
so that the seller can perform its duties. In the course of consultation, the employer
must consider representations made by the appropriate representatives and reply
to those representations stating the reasons for rejecting those representations, if
they are so rejected. The employer must allow the appropriate representatives
access to the affected employees and provide them with accommodation and facili-
ties as appropriate.
[515] The timing of the provision of such information and the consultation is often
an important consideration. The TUPE Regulations simply provide that the infor-
mation process should begin ‘long enough before a relevant transfer’ to enable
consultation to take place. The length of time may be dictated by an existing union
relationship or by course of conduct. The process must be completed before the
relevant transfer takes place.
[516] There are strict provisions dealing with the identity of the ‘appropriate rep-
resentatives’. If there exists a recognized independent trade union, the employer
must consult the trade union representatives and may not choose to consult other
representatives.
[517] However, if there is no recognized independent trade union, the employer
may consult with either:
(1) employee representatives who have been appointed or elected by the

affected employees for some other purpose; or
(2) employee representatives elected by the affected employees for the pur-
poses of informing and consulting about the transfer in an election satisfy-
ing the requirements of TUPE Regulation 14.166
[518] As regards (a) above, the burden is on the employer to show that the pur-
poses for and the method by which these representatives were appointed or elected
gives them authority from the employees to receive information and be consulted
about the proposed transfer on their behalf. A social committee, for example,
would be unlikely to suffice. Similarly, in (b), the burden falls on the employer to
show that the election satisfied the requirements of TUPE Regulation 14.
166 The requirements under Regulation 14 are detailed and could be a source of litigation in their own
right.
113

[519] Affected employees are employees of either the seller or the purchaser
(whether or not employed in the undertaking (or the parts of the undertaking) to
be transferred) who may be affected by the transfer or may be affected by measures
taken in connection with it. This means that both seller and purchaser may need to
carry out an election process and inform and consult.
[520] If the employer has invited affected employees to elect representatives and
they fail to do so within a reasonable time, then the employer must give to each
affected employee the information that would otherwise have been given to the
appropriate representatives.
[521] If the employer is a ‘micro-business’ (i.e., it employs fewer than ten employ-
ees), it has no existing appropriate representatives, and it has not invited any of the
affected employees to elect appropriate representatives, the employer will be able
to satisfy its information and consultation obligations by communicating directly
with affected employees. It can therefore avoid the administrative burden and time
delays involved in electing appropriate representatives.
[522] If the purchaser is proposing to make some of the transferring employees
redundant, this may trigger separate information and consultation obligations
under TULR(C)A 1992 (summarized above in the context of share sales). It may be
possible for the purchaser to commence collective redundancy consultation before
the transfer takes place, if the seller agrees. This has the advantage of reducing the
timetable for the proposed redundancies, and allowing the redundancy consulta-
tion to be run alongside the TUPE consultation.
[523] Finally, the Information and Consultation of Employees Regulations 2004
may mean that companies with more than fifty employees have established repre-
sentative bodies that they are required to inform about any developments in the
company’s activities and economic situation and to inform and consult about
employment prospects and decisions leading to substantial change in work organi-
zation or in contractual relations including transfers of employment.
Failure to Inform and Consult
[524] The maximum award for non-compliance with the provisions relating to
information and consultation under the TUPE Regulations is thirteen weeks’ pay
per affected employee. This liability is usually joint and several between the seller
and the purchaser under the TUPE Regulations. However, as a failure to consult
can also affect employee relations and morale, it is common for cross indemnities
to be sought in case either party has not complied with the obligations to inform
and consult. If the parties decide not to inform and consult (e.g., for reasons of con-
fidentiality), the parties should decide whether the possible costs should be reap-
portioned.
[525] The seller will also probably wish to seek an undertaking that the purchaser
has complied with its obligations under the TUPE Regulations both to consult with
its workforce if appropriate and to provide information to the seller in relation to
‘measures’ to be taken.
114

[526] As noted above, failure to comply with the collective redundancy consulta-
tion obligations under TULR(C)A 1992 may result in a maximum award of ninety
days’ pay per affected employee.
[527] Finally, failure to comply with the obligations under the Information and
Consultation of Employees Regulations 2004 can result in a penalty of up to
GBP75 000.
3.4.8 Pensions
Types of Pension Arrangement
Identification of the Type of Pension Arrangement
[528] The first and most important point is to establish precisely the type of cur-
rent and historic pension arrangements applicable to employees of the target com-
pany being sold or the employees of the company whose assets are being acquired.
The main distinction is between money purchase (or defined contribution) and
final salary (or defined benefit) benefit provision.
[529] The issues associated with defined benefit provision are likely to be signifi-
cantly more complicated. Often, the issues that arise can relate to historic pension
provision, arising from past accrual of employees of the target or even of the wider
corporate group. There are also different issues for share and business sales.
Money Purchase Funded Occupational Pension Schemes
[530] In the private sector, by far the most common arrangements in the UK today
are money purchase arrangements. These are arrangements where savings are
built up to fund benefits in retirement. The amount of savings is determined by the
investment return achieved from contributions paid into the scheme by the mem-
ber and his employer. The member bears all of the investment risk. Employees
typically receive money purchase benefits either by participating in a group per-
sonal pension plan, a contract-based pension scheme between the employee and a
third-party provider (usually chosen by the employer) or, if the employer has estab-
lished its own trust-based scheme, by participating in the employer’s occupational
pension scheme. Given the cost and regulatory requirements associated with oper-
ating an occupational pension scheme, there is an increasing trend towards
employers transferring their occupational pension schemes to defined contribu-
tion master trusts.
[531] On share sales, the main issues for due diligence are whether the arrange-
ment meets the employer’s minimum quality statutory auto-enrolment require-
ments and whether contributions to the arrangements have been paid when
required. Correcting even small errors in late (or incorrect) contributions can be
very complicated and costly, particularly where members have invested in a range
of investment funds. For occupational pension schemes providing money purchase
benefits, there is an increasing number of regulatory obligations, including the
115

requirement to publish an annual Chair’s Statement. It is important these are

checked.
Defined Benefit Funded Occupational Pension Schemes

[532] Defined benefit funded occupational pension schemes were historically
more prevalent in the UK. These arrangements promise a member a defined level
of benefit on death or retirement by reference to a multiple of the member’s salary
and the period during which they were an active member. Employers’ contribu-
tions to the scheme are determined at regular intervals to cover the cost of the
promised benefits. As well as traditional final salary schemes, there are also other
types of defined benefit arrangements, such as career average and cash balance
schemes. These can give rise to a number of issues on acquisitions and are covered
in more detail in the following sections.
Unfunded Pension Arrangements

[533] A third category of occupational pension schemes are unfunded pension
arrangements, whether or not registered for tax purposes. These are now increas-
ingly rare but were established for executives who were subject to tax limits on ben-
efits. It is important to establish the written evidence of the pension promise. It can
be the case that the terms of the pensions promise are given by a different group
company to the target company and the terms of the promise are unclear in their
scope. The seller will wish to ensure that the liability for the pension promise is
transferred to the purchaser’s group with effect from completion. Depending on
the terms of the pension promise, that may require the consent of the employee
concerned (and possibly the employee’s dependants).
Share sale – Defined benefit pension provision
Target Company is Principal Employer
[534] If the target company is the principal employer of a defined benefit scheme,
then the scheme will transfer automatically to the purchaser’s group with effect
from completion, unless steps are taken to substitute the principal employer.
[535] Where the purchaser is to acquire the whole scheme, the main commercial
issue is likely to be the level of its funding. There are different ways of calculating
the funding position of a defined benefit scheme that need to be understood:
– An accounting valuation will have a direct impact on the balance sheet of the
sponsoring employers (or group). Accounting practice can be quite prescrip-
tive as to how the liabilities of the scheme are measured. The purchaser of a
business with a defined benefit pension scheme will need to understand the
accounting treatment of the pension scheme.
– Every three years a pension scheme has to determine its ‘technical provi-
sions’. This will impact the level of contributions that are payable to the
scheme to meet any deficit in funding that arises. Typically, the trustees of the
116

pension scheme will need to agree this with the employer, but in some cases
the trustees will only be required to consult the employer.
– The most expensive way of valuing the pension scheme is a ‘buy-out’ valua-
tion. This is determined as the cost of buying out the scheme’s liabilities with
an insurer. Ultimately, in many cases, a sponsor will want to buy out the
scheme’s liabilities with an insurer.
[536] Actuarial advice should be sought when assessing the pension scheme’s
funding position. The level of deficit and actuarial assumptions used by the pen-
sion scheme will need to be considered and may impact any adjustment required to
the purchase price. It is also important to consider the position of the trustees of
the pension scheme, and in many cases involve the trustees early in negotiations.
Discussions will likely be needed with the trustees on the impact of the acquisition
on the covenant offered to the pension scheme and how this in turn affects the size
and speed at which deficit contributions are paid to the scheme. This will be an
increasingly important part of acquisitions given the wider powers granted to the
Pensions Regulator, including the possibility of being able to exercise criminal
sanctions.
[537] Other issues for a purchaser to consider are the balance of powers between
the sponsoring employer and the trustees as set out under the pension scheme’s
governing documentation. For example, it is important to check whether the trust-
ees have unilateral powers to wind up the scheme. This is more unusual, but would
provide the trustees with a significant power that would pose a significant risk to
the purchaser. Were the trustees to exercise the power, this would crystallize a one-
off payment representing the amount of the deficit in the scheme calculated on a
buy-out funding basis.
[538] Careful due diligence is needed to assess the risk of historic benefit issues
that may have arisen. For example, the failure to properly equalize normal retire-
ment ages between men and women is a common issue that can give rise to signifi-
cant additional liabilities for pension schemes that would not be reflected in
current deficits. This has been a major issue for pension schemes in the UK over
the past twenty years.
Target Company is Participating Employer and Employs All Active Members

[539] A second scenario is when the target company is not the principal employer
of a defined benefit pension scheme, but a participating employer (or former
employer) in the pension scheme. If all the active members of the pension scheme
are employed by that participating employer, then the seller is likely to want the
scheme to be transferred to the purchaser’s group. The same points as above will
apply, but there will be the additional requirements of changing the principal
employer of the scheme from the retained group company to a member of the pur-
chaser’s group.
[540] The governing documentation of the scheme will need to be checked to
ensure that this is possible. If no provision exists enabling this, it may be possible to
add a provision. In any case, trustee consent is very likely to be required to the
117

change of principal employer. Whether the trustees are likely to give that consent
will depend primarily on whether the scheme is adequately funded as at comple-
tion and the strength of the covenant of the proposed new principal employer.
Target Company Is Participating Employer but Does Not Employ All Active Members
[541] A third scenario is where the defined benefit pension scheme concerned is to
remain with the seller’s group after completion, and any active members who are
employees of the target company cease active membership of the pension scheme
as at completion. Where the target does not employ active members, the purchaser
will still need to ensure that steps are taken to achieve a clean break from liabilities
associated with a defined benefit pension scheme sponsored by the seller’s group.
In the following section we consider how to address the statutory debt that arises
when an employer ceases its association with the pension scheme.
Section 75 Debt
[542] A debt arises under section 75 of the Pensions Act 1995 where an employer
ceases to employ active members of the scheme at a time when at least one other
employer continues to employ active members. If the target is acquired and no sec-
tion 75 debt is triggered, a contingent section 75 debt can later be triggered at the
point the scheme is eventually wound up or the employer suffers an insolvency
event. The cost of the section 75 can be very expensive to meet as it is assessed as a
share of the buy-out deficit of the scheme.
[543] There are statutory mechanisms available which will enable the target com-
pany to limit the section 75 debt payable to a nominal amount or avoid payment of
any section 75 debt whatsoever. By far the most common way to achieve this is a
flexible apportionment arrangement. This is a statutory mechanism where one or
more employers agree to take on the liabilities of the target with the agreement of
the trustees of the pension scheme. As well as requiring the agreement of the trust-
ees, the arrangement would have to be notified to the Pensions Regulator. The
Regulator will likely want to be satisfied that the trustees acted appropriately in
agreeing to the terms of the arrangement. It should be noted that a flexible appor-
tionment arrangement is not the only arrangement available in this situation.
[544] The purchaser will be concerned about the risk of a contribution notice
being imposed by the Pensions Regulator under sections 38–41 of the Pensions Act
2004, by which the company or associated person is required to contribute directly
into the scheme to make good the debt. Purchasers will also be concerned that the
target company may potentially be the subject of a financial support direction
imposed by the Pensions Regulator for up to twenty-four months after the transac-
tion has completed.
[545] Further, under the Pension Schemes Act 2021, the Pensions Regulator has
new criminal and civil sanctions it can impose on any person where the recovery of
an employer debt is prevented or otherwise compromised and new additional
grounds under which it can impose a contribution notice. In light of these
extended powers, which are expected to take effect in Autumn 2021, the seller and/
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or purchaser may wish to apply for clearance from the Pensions Regulator in
respect of any action which may impact an employer debt falling due.
[546] The seller may also need to notify the Pensions Regulator pursuant to sec-
tion 69 and 69A of the Pensions Act 2004 on a share sale of the target company if
the target company is a subsidiary that participates in an occupational pension
scheme. Failure by an employer to notify the Pensions Regulator of a notifiable
event may result in a fine of up to GBP50 000, due to increase to up to GBP1 000
000 when the relevant sections of the Pension Schemes Act 2021 comes into force
(expected to be early 2022).
Transfers
[547] In far less common cases there is a transfer of liabilities for employees from
one defined benefit pension scheme to another. In these circumstances, a transfer
payment would be negotiated between the seller and purchaser.
Asset Sale – Money purchase and defined benefit pension provision
Pension Protection on the Transfer of Employment

[548] Protections are contained in the TUPE Regulations and sections 257–258 of
the Pensions Act 2004. Under TUPE, the simple position is that any contractual
right to a personal pension arrangement (such as a group personal pension
arrangement) transfers by operation of TUPE, whereas rights to occupational pen-
sion scheme benefits do not transfer. (There is an exception for certain early retire-
ment rights, considered further at [497].)
[549] Under sections 257–258 of the Pensions Act 2004, the purchaser is required
to provide a minimum level of pension provision to the transferring employee
when the employee is a member of an occupational pension scheme of the seller,
either money purchase or defined benefit. The purchaser must match employees’
contributions up to a maximum of 6 per cent of remuneration if it is offering a
money purchase arrangement (or, if less, match the contributions payable under
the seller’s scheme).
[550] It is also worth noting that section 258(6) of the Pensions Act 2004 allows the
purchaser to agree with transferring employees (at any time after the transfer) that
the pension protection provisions shall not apply to them.
[551] Following the Beckmann167 and Martin168 cases, and as affirmed in Proctor &
Gamble,169 certain early transfer rights transfer by operation of TUPE. A common
example is enhanced redundancy rights under a defined benefit pension scheme.
167 Beckmann v. Dynamo Whicheloe Macfarlane Limited [2002] All E.R. (EC) 865; ECJ-Case C-164/00 4 Jun.
2002.
168 Martin v South Bank University [2004] IRLR 74
169 Proctor & Gamble Company v Svenska Cellulosa Aktiebolaget and another [2012] EWHC 1257 (Ch),
119

This is usually only an issue for active members in defined benefit accrual immedi-
ately before the date of the TUPE transfer but can be relevant for deferred mem-
bers also. These employee promises may also survive subsequent TUPE transfers
and can be relevant in share sales where employees have historic rights that trans-
ferred by operation of TUPE.
3.5 Auction Sales
Introduction
[552] When a proposed sale of a company or business is likely to generate interest

from a number of potential purchasers, a seller may choose to invite competing
offers in an effort to achieve the best possible terms for the sale.
[553] In these circumstances, the seller will usually engage a corporate finance
adviser to advise it on the sale process and the potential purchasers. The adviser
will identify a number of interested parties who will be asked to give confidentiality
undertakings. Those interested will then normally be sent an information memo-
randum, containing preliminary information about the business to be sold, and be
asked to submit indicative offers.
[554] A shortlist of potential purchasers will be permitted to conduct a due dili-
gence investigation and will usually be sent draft sale documentation prepared by
the seller’s solicitors. The potential purchasers will be asked to submit final offers
on the basis of that documentation (subject to any essential amendments), the
intention being to ensure that the offers are made substantially on the same terms
so that they can easily be compared.
[555] At the outset of the tender sale process, consideration should be given to:
– whether an auction will in fact achieve the best price for this particular busi-
ness at this particular time amongst the anticipated potential purchasers;
– how relationships will be managed with employees, customers, suppliers,
and regulators;
– the best way to gather, organize, and disclose information to the potential
purchasers;
– how confidential, sensitive, or privileged information can best be preserved;
and
– how to maintain the competitive tension until the last possible moment.
Advantages and Disadvantages of a Sale by Tender
Advantages
[556] The tender process has the following advantages:
120

– Best price: The purpose of the tender process is to generate competitive ten-
sion among potential purchasers so as to obtain the best price. A seller who
uses a tender process will be perceived to have taken steps to obtain the best
price. This is particularly important when the seller is a company or there are
a number of sellers represented by one negotiator: the directors of the com-
pany or the negotiator, as the case may be, are/is less likely to be accused of
favouring a particular purchaser or of otherwise not acting in the best inter-
ests of the seller(s).
– Control over documentation and timetable: The tender process can be used
to exert considerable control over the sale documentation (that would nor-
mally be drafted by the purchaser’s solicitor), in addition to the timetable.
Disadvantages
[557] The sale of a company or business by tender gives rise to certain difficulties
that would not arise if negotiations were conducted with only one purchaser. Other
difficulties that arise on any sale can be exacerbated by the tender process.
[558] In practice, many of the potential problems with a sale by tender can be
avoided, or at least mitigated, by filtering out the lower bidders at an early stage,
permitting a limited number to conduct detailed due diligence.
– Secrecy and the need for announcements
[559] It is almost impossible to maintain secrecy about the tender process; plans to
dispose of the business are likely to become known to trading partners, employees,
and competitors. In the case of a listed seller, the fact of the auction may affect the
price of its shares and an announcement of the intended sale may be necessary. If
there is no sale of the business following the tender process, public knowledge of
the failed attempt may damage the business, and prejudice prospects of a future
sale.
– Problems with customer and supplier relationships
[560] Particularly if the business to be sold relies on long-term relationships with

customers and/or suppliers, uncertainty over the future ownership of the business
may adversely affect trade and, therefore, the sale proceeds. If the potential pur-
chasers include customers or suppliers of the business, trading relationships with
unsuccessful bidders may be affected.
– Key contracts relating to the business to be sold may contain provisions restricting
assignment or giving a right to terminate on a change of control.
[561] While this would also need to be addressed in a bi-partite negotiation, it may
make it more difficult to assess whether it will be possible to proceed with any par-
ticular bidder and so to choose between competing bidders. Allowing for discus-
sions between several potential purchasers and the other parties to the contracts
may damage the business and will certainly complicate the tender process.
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– Disaffected employees
[562] The inherent uncertainty in the tender process may disaffect key employees,
who may leave or cease to perform effectively. Bonus arrangements for loyalty over
the transition period may alleviate this problem to some extent but, in the case of a
sale of a company, questions of financial assistance may need to be considered if the
company were to bear the cost of this bonus.170
– Employee consultation requirements
[563] Any requirement to consult with employees’ representatives, unions or works

councils would need to be factored into the tender process and any such consulta-
tions will be more cumbersome with several potential purchasers. Early advice from
pensions and employment law specialists should be sought in all cases.171
– Confidentiality
[564] The tender process will normally lead to the dissemination of information
about the business to a number of potential purchasers, some of whom may well be
competitors of the business. Competitors may then be able to make use of the
information to the detriment of the business if they are unsuccessful in their
attempt to purchase it. The dissemination of information may therefore tend to
reduce the value of the business, leading to lower offers by potential purchasers.
Confidentiality undertakings from the recipients of information should help pre-
vent its misuse, but the ability to take legal action after the breach of such an under-
taking (even if it can be proved) may be of limited comfort once the damage has
been done.
– Loss of privilege
[565] The danger of losing privilege in documents relevant to present or future

litigation by disclosure to third parties is greater where more than one potential
purchaser is conducting due diligence. It is therefore important for the seller to
identify privileged documents early in the process and ensure that they are not
included in the data room.
– Regulatory problems
[566] If the business to be sold is subject to a regulatory regime or the sale may give
rise to competition issues, the offers made by the potential purchasers are likely to
be made conditional on regulatory clearance. This may make it difficult to weigh
up the merits of various offers. In addition, potential purchasers may be reluctant
170 The prohibition on giving financial assistance does not apply to a private company giving assistance
for the acquisition of its own shares or those of another private company, but the prohibition contin-
ues to be generally relevant to acquisitions by, or of, public companies. See earlier section dealing
with financial assistance, and section dealing with acquisitions of public companies, below.
171 See the employment section of Specialist Areas, above.
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to divulge information on their own market share, etc., when there are other per-
sons negotiating for the purchase; this may make it more difficult for the seller to
determine the potential pitfalls of dealing with any particular purchaser.
– The structure of the disposal
[567] If the sale of the business could be structured in a number of ways, for
example, as the sale of shares in a company or the sale of a business and assets, or
as a whole or in its constituent parts, it may again be difficult to weigh up the merits
of various offers. When a business is divisible, it may be appropriate to consider
splitting the documentation to relate to its constituent parts and conducting sepa-
rate but simultaneous auctions. However, if a business is split, there may be less
value in the aggregate of the constituent parts than there was in the whole. There
may also be areas of ongoing interdependence between the parts of the business
which would need to be identified and documented. Generally, the seller sets forth
the structure upon which it will consider bids in the procedure letters distributed to
potential purchasers. As the seller generally sets forth a structure that is efficient to
it from a legal and tax point of view, this adds some pressure on potential bidders to
try to accommodate the structure proposed by the seller.
– Problems with financing
[568] It is not uncommon for bids to include certain financing conditions. Bids
including financing conditions are more common in transactions organized by pri-
vate auction sale than in other M&A transactions, largely because financial inves-
tors participate in most auction sales. In order to carry out a proper comparison of
bids received, the seller should enquire early on in the process about the prospec-
tive purchasers’ sources of financing, as well as the conditions attached to such
financing. In some cases, a seller may ask bidders early on in the process to pro-
duce evidence of a commitment by any proposed third-party finance provider and/
or arrange for discussions with the finance providers. In addition, the seller may
ask for representations and warranties from the purchaser regarding its capability
to finance the transaction and the disclosure of any bank guarantees, etc. to sup-
port this. Even if appropriate guarantees are provided, the seller should consider
that a broad financing condition in the acquisition agreement may result in a con-
siderable risk that the purchaser will later ‘opt out’, because loan agreements and
guarantees are generally subject to extensive conditions, and the purchaser may
not be able to comply with these. Therefore, instead of accepting a general financ-
ing condition, the seller could insist on more specific and narrow definitions of the
‘material adverse change’ events that give the purchaser the right to abandon the
transaction.
– Purchaser’s indemnities
[569] If any liability of the seller in respect of the business to be sold (e.g., a guar-
antee) cannot be extinguished at completion of the sale and is to be covered by an
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indemnity from the purchaser, the creditworthiness of the potential purchasers will
need to be considered in addition to the price and terms offered.
– Referential bids
[570] Generally, competing offers are invited on the basis that each bidder submits
a fixed bid without knowing of the bids submitted by other bidders. This is in con-
trast to an open auction in which bidders can adjust their bids by reference to rival
bids. It is desirable to include a specific reservation in the auction terms regarding
the seller’s right to accept any offer made, whether or not it is the highest or in con-
formity with the terms of the invitation to submit offers.172 If the seller wishes to
encourage referential bids, care must be taken in drafting the invitation to submit
offers, including the fact that the process will not work unless at least one bidder
submits a non-referential fixed bid or some other fixed element is introduced and
consideration as to whether each bidder who makes a referential bid should specify
the maximum sum that the bidder is prepared to pay.
– Costs
[571] The cost to the seller is usually higher in the context of a tender process.
Loss of Competitive Tension
[572] Once a potential purchaser becomes the preferred bidder, it will know that
the seller has already tried to interest all likely purchasers, and it can be reasonably
confident that it will not be outbid by any other potential purchaser. At this stage,
the competitive tension is lost and the advantage shifts from the seller to the pur-
chaser.
[573] The purchaser may then press for more due diligence information, negoti-
ate heavily on the sale contract, and attempt to reduce the price. Although the
seller has the option to cease negotiations and to seek to deal with the second high-
est bidder, that bidder is then likely to know that it is now the highest bidder and,
moreover, that the first bidder withdrew during negotiations and due diligence.
[574] In order to maintain competitive tension, the seller may take various steps.
The seller will give no indication until the latest possible stage as to the success of
the process, the number of bidders, or whether the bid is at the high or low end of
the spectrum.
172 In the case of Harvela Investments Ltd v. Royal Trust Co of Canada (CI) Ltd [1986] AC 207, when such a
reservation was not included, it was held that the sale was to be effected by fixed bidding, so that the
second bidder was not entitled to submit a referential bid and the sellers were therefore bound to sell
to the first bidder.
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Structure
Corporate Finance Advisers

[575] Corporate finance advisers are used for their knowledge of the relevant mar-
ket and the players in it, and for their experience in handling auctions. They may
also usefully act as a buffer between the seller and the potential purchasers to con-
trol the disclosure of information.
[576] The involvement of an ‘authorized person’ may be required if a financial
promotion173 is made. However, in many cases, an exemption from the financial
promotion regime will apply, and in these cases, it is for the seller to decide
whether to engage a corporate finance adviser in connection with the sale. Such an
appointment will increase the cost of the disposal, because fees must be paid.
Timetable
[577] The proposed timetable must be considered carefully in each case. It is nec-
essary to balance the desire to complete the process quickly against the complexity
of the business to be sold and allow the potential purchasers time to digest their
due diligence.
[578] Table 5 sets out a simplified cascade of events in the context of the auction
process. Frequently, circumstances will require greater flexibility, and the seller
should take care to reserve its right to amend the sale process at any stage without
notice. It should be noted that even if the right is reserved to make changes ‘with-
out prior notice’, this means without advance notice, as opposed to with no notice.
Amendments will only have effect on notification.174
Table 5 Auction Process: Simplified Cascade of Events
• Information gathering and planning (including despatching information

memorandum and setting up the data room)
• Seller drafts the principal documentation
• Data room opens to selected first-round bidders
• Indicative offers by first-round bidders
• Second-round bidders shortlisted
• Second-round bidders continue due diligence and submit final offers (includ-
ing make up of principal documentation)
173 See the section on s. 21 of FSMA, below, paras [590]–[594].

174 Bainbridge v. Circuit Foil (U.K) Ltd [1997] I.C.R. 541.
125

• Striking the basic deal with preferred bidder (and sometimes granting exclu-
sivity)
• Negotiating the principal documentation
• Exchanging the acquisition agreement
• If the acquisition is conditional, dealing with the conditions (e.g., seeking
shareholder approval or various merger, regulatory or industry consents)
• Completing immediately after exchange, if there are no conditions, or, if
there are, a few days after those conditions have been satisfied
• Dealing with post-completion matters
Legal Issues
Misleading Information
[579] To a greater or lesser extent, auction processes depend upon potential pur-
chasers not knowing what the other purchasers are doing or thinking. However, the
seller and its corporate finance adviser should be aware that they may face criminal
and/or civil liability if they make misleading statements about the progress of the
tender process. Similar liability will attach to misleading statements about the busi-
ness to be sold.
Misrepresentation
[580] If the purchaser decides to pursue a misrepresentation claim, the availability
of a remedy and quantum of damages depends on the categorization of the misrep-
resentation as fraudulent, negligent, or innocent.175
[581] An additional consideration in the context of an auction is that if a negligent
statement is made that causes loss to an unsuccessful potential purchaser, the pur-
chaser may be able to claim damages if the maker of the statement owed it a duty of
care under the line of cases starting with Hedley Byrne & Co Limited v. Heller & Part-
ners Limited.176
Part 7 of the FS Act177

[582] Part 7 of the FS Act will be applicable if shares in a company are to be sold by
tender process. The section will not apply on an asset sale unless the assets include
‘relevant investments’ as defined in FSMA. Part 7 of the FS Act is discussed above at
Summary of Legislation and the Regulatory Framework.
175 See discussion above at Contractual Protection.

176 [1964] AC 465.
177 Considered also in the context of acquisitions of public companies.
126

The Information Memorandum
[583] An information memorandum is usually sent to potential purchasers to

enable them to make indicative offers at the first stage of the tender process.
[584] The memorandum will give basic information about the business to be sold
and will indicate the principal terms that will appear in the sale documentation. If
there are difficult points that might arise in negotiations, these should be
addressed clearly in the memorandum.
[585] The information memorandum is made available only after the potential
purchaser has given a confidentiality undertaking, and each copy should be indi-
vidually numbered so that unauthorized copies can be traced.
Disclaimers
[586] The seller will wish to disclaim any legal liability in respect of the informa-
tion contained in the information memorandum, so that the purchaser can only
rely on the warranties and indemnities given in the contractual sale documenta-
tion. Every information memorandum therefore has a series of disclaimers dis-
played prominently at the front of the document.
[587] The seller and its corporate finance adviser should be reminded of the
offences under Part 7 of the FS Act.178 Liability for these offences will not be
avoided by any disclaimer. Similarly, a disclaimer will not relieve the corporate
finance adviser of any obligation under the rules of the FCA in respect of the issue
or approval of an information memorandum as a financial promotion.
[588] The seller should also be warned that the disclaimers may not be a complete
defence to a claim for misrepresentation, if any of the information in the document
is misleading. Section 3 MA (as substituted by section 8 of the Unfair Contract
Terms Act 1977) provides that a contractual term seeking to exclude liability for
any misrepresentation will be effective only if it is reasonable.
Requirement to Publish a Prospectus
[589] If the proposal is to sell shares in a company (rather than a business and
assets) and the information memorandum contains a contractual offer or an invi-
tation to treat, the distribution of the information memorandum may be construed
as a public offer of securities requiring the issue of a prospectus. This will not be the
case if any of the exemptions apply: for example, if the memorandum is circulated
to fewer than one hundred and fifty persons (other than qualified investors) in the
UK or is made to or directed at qualified investors only.
178 Considered above, for example, in the section on Contractual Protection which considers the disclo-
sure exercise, and below: see the discussion of the documents from the offeror and the target board in
the section dealing with acquisitions of public companies.
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Section 21 of FSMA
[590] Any communication to potential bidders in an auction sale, including the

information memorandum, will be regarded as a financial promotion for the pur-
poses of section 21 of FSMA if it relates to the sale of shares in a company or other
relevant investments. The section will not normally be relevant to a sale of a busi-
ness and assets.
[591] As we have discussed, the section prohibits the communication, in the course
of business, of an invitation or inducement to engage in investment activity unless:
– the communication is made or has been approved by an authorized person;
or
– one of the exemptions in the FSMA (Financial Promotion) Order 2005
applies. Breach of the prohibition is a criminal offence and resulting con-
tracts may be unenforceable.
[592] The prohibition does not apply to:
(1) communications made to ‘high net worth companies’, which include:

(a) companies with GBP5 m called-up share capital or net assets; and
(b) companies with GBP0.5 m called-up share capital or net assets and
more than twenty shareholders or are subsidiary undertakings of com-
panies with more than twenty shareholders (subsidiary undertakings of
public companies will usually qualify) (Article 49);
(2) communications made to investment professionals (i.e., authorized per-
sons or persons whose ordinary business includes buying or selling shares)
(Article 19);
(3) most communications made to overseas persons (Article 12);
(4) communications relating to transactions to acquire or dispose of shares in
a body corporate (C) or entered into for that purpose when:
(a) the shares (including shares already held by the person acquiring
them) consist of or include at least half of the voting shares in C (in this
case the sale must be by a single seller or group of connected sellers
and the acquisition must be by a single purchaser or group of con-
nected purchasers); or
(b) the object of the transaction may nevertheless reasonably be regarded
as being the acquisition of day-to-day control of the affairs of C (Article
62). If communications subject to the financial promotion restriction
are made to several holders, or holders of less than half, of the voting
shares in C, then the exemption in Article 62 is unlikely to apply unless
the proposed transaction would involve the acquisition of day-to-day
control of the affairs of C (i.e., by a person who will be an ‘owner/
manager’) from a person or persons in a similar position;
(5) certain ‘one-off ’ communications as prescribed by the FSMA (Financial
Promotion) Order 2005.
128

[593] When there is any doubt as to whether an exemption may apply in relation to
a sale of shares, the use of an authorized corporate finance adviser to make or
approve all communications to the bidders will remove the danger of a breach of
the financial promotion rules.
[594] When the financial promotion rules are not an issue (either on a business
sale or because an exemption clearly applies), it is up to the seller whether it
engages a corporate finance adviser in connection with the sale.
Practical Issues
Sale Documentation
[595] Draft sale documentation will be prepared by the seller and its legal adviser
and submitted to the shortlisted potential purchasers for them to consider on the
basis of their due diligence review. All issues, including, for example, tax and pen-
sions, should be considered and covered in the documentation. The package of
documentation should include:
– the sale contract;
– the disclosure letter (although specific disclosures may follow later);
– if offered, the tax covenant and any environmental deed (in the case of a
share sale where the environmental covenant/indemnity is not included in
the sale contract); and
– any arrangements for continuing equity participation by the seller in the
business to be sold.
[596] Although the temptation may be to issue a draft sale contract that heavily
favours the position of the seller, this should be resisted, because an obviously one-
sided draft will encourage a full-scale marking-up exercise by the potential pur-
chasers and their legal advisers, leading to more protracted negotiations and, quite
possibly, a worse overall position for the seller.
Due Diligence and Access to the Due Diligence Material
[597] With more than one shortlisted potential purchaser needing to conduct a
due diligence investigation, the seller must take control of the disclosure process in
order to avoid wasted effort in responding to questions from several different pur-
chasers. The seller will also wish to keep control over the dissemination of confi-
dential information.
[598] The seller will therefore usually conduct its own internal due diligence inves-
tigation, gathering and cataloguing information in response to a questionnaire
prepared by its solicitors. The results of this internal investigation are then evalu-
ated and appropriate information made available to the shortlisted purchasers.
The information can be provided by access to such information in a data room by
putting the information on a secure website that can be accessed via the internet (a
‘virtual data room’), on CD-ROM or USB (although for reasons of confidentiality
129

and business sensitivity these are rarely used in auctions) or in hard copy, in a physi-
cal data room.179
[599] The use of electronic media may be more convenient if, for example, the
potential purchasers are widely scattered and there is no convenient location for a
data room. A further advantage is that it may be easier to show that fair disclosure
has been made (if this is required by the sale contract) if copies of the documents
are in the possession of the purchaser rather than being available for inspection in
a physical data room and, in particular, if the data has been organized so that it can
be searched electronically, as electronically stored information can be manipulated
and searched in ways that are not feasible with paper documents.
[600] The use of electronic media as a way of dealing with due diligence should be
considered and planned carefully before being pursued. The disadvantages
include the fact that copies are placed in the hands of the potential purchasers, that
electronic copies can easily be disseminated widely, and that it is difficult to make a
virtual data room completely secure from the threat of computer hackers or pro-
spective purchasers downloading confidential information. In an auction sale, it
may be difficult to tailor the information made available to different potential pur-
chasers. There will probably need to be a two-tier due diligence process with less
sensitive documents being made available electronically and all the significant and
confidential documents and those documents (such as title deeds) that benefit from
a physical review being dealt with in a more traditional way. In many cases, it may
be better to focus on the material information about the business to be sold, rather
than finding ways of disclosing vast amounts of immaterial documents.
[601] Documents that are only available in hard copy must be scanned before they
can be made available in electronic form. When documents are bound, consider-
ation should be given to whether it is appropriate to unbind them for the purposes
of scanning them. Bound documents can still be scanned, but it will take much
longer. Unbinding original documents may affect their validity or their evidential
value. Examples of documents that should not be unbound include documents of
title, statutory declarations, and notarized documents.
[602] When electronic media are used, the purchaser should be prohibited by the
terms on which the information is made available from storing or using the infor-
mation on any computer hardware or network of computer hardware that is not
under its exclusive control. In addition, the seller should expressly exclude all
express or implied representations that the software will operate error free or that
any software or data are free from any virus, fault, or other defect. The seller should
also exclude liability for any expenses, loss, or damage resulting from the purchas-
er’s use of the technology used to give it access to the information.
179 Considered above; see Due Diligence and also the consideration of the disclosure exercise in Con-
tractual Protection.
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Vendor Due Diligence and the Role of the Seller’s Legal Adviser
[603] The seller’s legal adviser will typically help the seller gather information and
prepare the data room for the bidders. Sellers, often in the context of auction sales,
may ask legal advisers to produce a vendor’s due diligence report, making only this
document available to the bidders. This approach significantly increases the liabil-
ity exposure of the seller’s lawyers, and they will usually resist that request. Produc-
ing a vendor’s due diligence report generates the possibility of the bidders taking
action against both the seller and the seller’s counsel and has also the potential of
generating a conflict of interest between them.
[604] If the seller’s legal adviser agrees to produce a vendor’s due diligence report,
all the bidders are likely to be asked to counter-sign a non-reliance letter issued by
the seller’s legal adviser which defines the scope of work and the methodology
used. The non-reliance letter will contain an absolute disclaimer so that only a suc-
cessful bidder may place any reliance on the report. The successful bidder will be
required to sign a separate reliance letter usually containing a cap on the adviser’s
overall liability under the letter, depending on the standards in the respective juris-
diction (e.g., market practice and professional regulations), the approach of the
specific firm involved, and on the type of transaction and the risks involved. On the
whole, notwithstanding the existence of vendor’s due diligence, purchasers gener-
ally conduct their own confirmatory due diligence.
3.6 Acquisitions of Public Companies

3.6.1 Introduction180
[605] There are two principal methods by which an offeror may acquire the entire
issued share capital of a public company, the shares of which are widely held. These
methods of acquisition are a contractual takeover offer (which can be used whether
or not the deal is recommended by the target board) and a scheme of arrangement
(which is generally used only if the deal is recommended by the target board). This
section uses the terms ‘takeover’ or ‘takeover offer’ to refer to both methods. Differ-
ences between the rules applicable to contractual takeover offers and to schemes
are highlighted where relevant.
[606] A contractual takeover offer is an offer made by a bidder to acquire the
shares held by the target company’s shareholders. The shareholders are invited to
accept the bidder’s offer. A scheme of arrangement is a statutory court process
which is technically initiated by the target company. The target company share-
holders are asked to vote on the takeover proposal, which is put to them by the tar-
get (in conjunction with the offeror).
180 This ‘Acquisitions of Public Companies’ section reflects changes to the City Code which will come
into effect on 5 Jul. 2021.
131

[607] A company effecting a takeover or merger using a scheme must use what is
known as a ‘transfer scheme’. Under a transfer scheme, the shares in the target
company are transferred to the bidder by effect of a court order; as there is a trans-
fer of shares, stamp duty is payable. (There is also another kind of scheme known as
a ‘cancellation scheme’; under a cancellation scheme, the shares in target are can-
celled and the reserve arising on the cancellation is capitalized and applied in pay-
ing up new shares, which are issued and allotted to the new owner. On a
cancellation scheme there is no transfer of shares and therefore no stamp duty.
However, since 2015, it has not been possible to use a cancellation scheme for a
takeover or merger and their use is now effectively limited to new holdco schemes
and reorganizations. Cancellation schemes are therefore not considered further
and references to a scheme or to a scheme of arrangement mean a transfer
scheme.)
[608] A key advantage of a scheme is that it requires a lower percentage approval
from the target shareholders in order to guarantee that the offeror will acquire all
of the outstanding shares in the target. A scheme requires approval by a majority in
number representing three-quarters in value of the members who vote at the meet-
ing convened by the court for the purpose of considering the scheme. Once a
scheme is approved by shareholders and sanctioned by the court, the arrange-
ments are binding on all members and on the company. In the case of a contractual
takeover offer, acquisition of 100 per cent ownership after the offer has gone
unconditional is not guaranteed – it will depend on whether the bidder can com-
pulsorily acquire the remaining shares under sections 979–982 CA06. A scheme
therefore has advantages over a contractual takeover offer, which may leave a
minority interest to be squeezed out. However, a scheme has certain disadvantages,
including the need for the transaction to be governed by the court timetable.
[609] The principal differences between a contractual takeover offer and a scheme
of arrangement are summarized in Table 6.
Table 6 Contractual Takeover Offer Versus Scheme of Arrangement: Principal Differ-

ences
Offer Scheme
Required approval level in excess of Required approval level 75 per cent by
50 per cent of issued share capital of value of shares voted PLUS majority by
the target (in reality, the level of sup- number of shareholders present and
port required is likely to be much voting either in person or by proxy at
higher to avoid a minority remain- the shareholders’ meeting. Separate
ing). class meetings are required for those
with separate interests. Bidder cannot
vote any shares it may own in target.
132

Offer Scheme
Possibility of minority remaining (if Certainty of no minority remaining if
holders of less than 90 per cent of the scheme is approved by target
target shares and voting rights to shareholders and sanctioned by the
which the offer relates accept the Court.
offer).
Potentially shorter timetable for obtain- Generally, a longer time period for
ing control (but, in a hostile situation, obtaining control due to the need to
the timetable may be significantly obtain Court approval to convene the
longer). shareholders’ meeting.
No Court sanction required. Court sanction required. The required
meetings also create a potential forum
for objections.
More flexibility to change terms after Little flexibility to change terms (other
posting of documents. than increase price) after posting of
documents without restarting the time-
table.
The offer document is issued, and the The scheme document is issued, and
process controlled, by the bidder. the process controlled by, the target.
Any attempt by the bidder to gain con-
trol over the process contractually by
entering into an ‘implementation
agreement’ with the target that obliges
the target to do certain things is
broadly prohibited by the City Code.
The City Code contains obligations on
the target to implement the scheme in
accordance with an agreed timetable in
order to mitigate the effects that the
lack of an implementation agreement
could have on the scheme process.
133

Offer Scheme
However, such perceived mitigation is
rather illusory as the board of the tar-
get company can simply withdraw its
recommendation of the offer in order
to avoid implementing the scheme. In
such a case, the offeror’s only real pro-
tection are the long-stop dates at
which it can withdraw its offer if cer-
tain milestones in the scheme process
have not been reached.
Bidder is generally locked in until the No acceptance condition and therefore
long-stop date and if earlier, when all bidder is generally locked in until the
conditions are satisfied. However, long-stop date.
there is potential for bidder who for
whatever reason wishes to lapse its
offer before the long-stop date to try
to do so by publishing an ‘Acceptance
Condition Invocation Notice’. If on
the expiry of the notice, acceptances
have not reached the level specified in
the notice, the offer will lapse.
Also potential for bidder who wishes
its offer to succeed to shorten the
timetable by publishing an accelera-
tion statement that brings forward the
date by which all conditions must be
satisfied. The offeror must waive any
outstanding regulatory conditions in
order to do this.
FCA-approved prospectus required in No prospectus requirement even on a
respect of any offer including shares share for share exchange (as not an
(or other transferable securities) as offer to the public), unless consider-
consideration. (In some circum- ation shares amount to 20 per cent or
stances, the bidder can instead issue a more of the relevant class already
takeover exemption document that admitted to trading. The FCA has
may not require FCA approval.) indicated that a prospectus may be
134

Offer Scheme
required if a shareholder is required to
make an ‘investment decision’ (e.g., if a
scheme offers a cash alternative to
shares), but this is not the view held by
the majority of City practitioners and
there is as yet no firm consensus on
this issue.
Market purchases can be used to Market purchases are not helpful since
increase the chances of success of an shares already owned by the bidder
offer, as they count towards the accep- will not form part of the class approv-
tances of the offer (but note that they ing the scheme, and indeed can be
will not count for compulsory acquisi- counter-productive where there is an
tion purposes if made before the offer active dissentient minority (as they
document is posted, or (if made after reduce the number of shares in the
that time) if made for more than the class and therefore the number of
offer price). Any market purchases shares for a blocking stake).
made in the three months prior to an
offer being made or during the offer
period will generally (re)set the offer
price at that (higher) level.
Shares acquired pursuant to irrevo- There may be a risk in obtaining irre-
cable undertakings count towards the vocable undertakings as the Court
acceptance condition and the compul- might decide that it would be unfair to
sory acquisition threshold, which sanction the scheme in certain circum-
makes it more likely that the offer will stances where some shareholders were
be successful. obliged to vote in favour of the scheme
pursuant to their undertakings (e.g.,
where a higher offer has been made).
However, in practice it is common for
irrevocable undertakings to be used on
a scheme.
Any overseas securities legislation that A scheme generally gives rise to fewer
is applicable for certain ‘difficult’ overseas securities requirements where
jurisdictions may impose onerous there are overseas shareholders, as it
requirements (e.g., Australia, Canada, involves a ‘shareholder vote’ rather
Japan and the USA). than an individual investment decision
by each target shareholder.
135

Offer Scheme
All conditions must be satisfied or, All conditions must be satisfied or
where applicable, waived by Day 60 waived by the time of the Court hear-
after publishing the offer document. ing to sanction the scheme. This may
However, the 60-day period can be allow more time, as schemes do not
suspended for official authorizations have to be completed within the sixty-
and regulatory clearances if any have day timetable that applies to contrac-
not been satisfied or waived by Day tual offers. However, this advantage is
37. The Panel may agree to suspend not so significant, since the sixty-day
the timetable at the joint request of period for contractual offers can be
the bidder and target, or at the suspended at the request of the bidder
request of either party provided at or target (see opposite). As the target
least one of the outstanding condi- alone controls the timetable on a
tions relates to a material official scheme, a contractual offer may argu-
authorization or regulatory clearance. ably give the bidder more control in
This means that contractual offers can this regard.
accommodate lengthy official clear-
ances and authorizations.
It is possible to have a hostile or con- In practice, a scheme is not used where
tested offer. there is a hostile bid. Schemes have
been used in contested situations, but
this remains very rare.
An application to Court is required Lost and untraceable shareholders are
for lost and untraceable shareholders not likely to be relevant, due to the 75
to be taken out of the equation in cal- per cent (by value of shares voted) and
culating the 90 per cent level of a majority (by number) required
acceptances in order for the bidder to approval levels.
be entitled to squeeze out the minor-
ity.
The City Code requires detailed dis- In addition to the City Code require-
closure of financial and other infor- ments, the scheme document will com-
mation from both the target and the prise an explanatory statement in
bidder. accordance with section 897 CA06, a
formal technical document setting out
the proposals embodied in the scheme
and notices of a Court meeting and,
where necessary, a general meeting of
target shareholders.
[610] A scheme of arrangement, governed by sections 895–901 CA06, is an ‘offer’

for the purposes of the City Code. Appendix 7 to the City Code provides that the
City Code applies to schemes of arrangement in the same way as to a conventional
136

offer, other than as set out in Appendix 7. Appendix 7 also contains a list of City
Code provisions, which expressly do not apply to a scheme of arrangement.
3.6.2 The Regulatory Bodies
[611] Takeovers in the UK are regulated by a number of different authorities,

deriving their powers from several sources.
The FCA and the Panel on Takeovers and Mergers
[612] The FCA and the Panel oversee takeovers of (broadly) UK listed companies.
As we considered above,181 the rules of the FCA are set out in the FCA Handbook,
including the Listing Rules, the UK Prospectus Regulation, and the DTRs. The
Panel’s rules are set out in the City Code,182 which applies once a takeover has
begun or when a takeover is reasonably in contemplation.
Government Departments
[613] Government departments and other bodies may become involved in a take-
over. Examples are the PRA and FCA (in their respective roles as regulators of
financial services), the CMA (previously the OFT and the Competition Commis-
sion) in the exercise of antitrust-type functions under the EA.
European Commission
[614] In certain cases,183 the European Commission has exclusive jurisdiction to

review competition issues, to the exclusion of the national competition authorities
of EU members states under whose regimes the transaction would otherwise fall
(the so-called one-stop shop). Since the UK’s departure from the EU, UK compe-
tition issues fall outside the remit of the European Commission.
Other Regulatory Authorities

[615] Other regulatory consents may be required for particular takeovers, for
example, those of licensed water companies or newspaper and television compa-
nies.
181 See the section summarizing the legislation and the regulatory framework in the context of private
acquisitions at para. [18] onwards above.
182 Unless specified otherwise, any reference in this ‘Acquisitions of Public Companies’ section to a
‘Rule’ is to a rule of the City Code.

183 Described above; see the competition section of Specialist Areas.
137

3.7 Takeover Control

[616] The following is a summary of the principal legislation and rules under
which UK takeovers are regulated.184
3.7.1 Prospectus Requirements and the Listing Rules
[617] If the consideration being provided by the offeror is in the form of shares, an
FCA-approved prospectus is likely to be required. A prospectus must be published
in relation to any offer of transferable securities to the public in the UK, or any
request for admission of transferable securities to trading on a regulated market
(which includes the Main Market of the London Stock Exchange but not AIM, the
ISM or the PSM), subject to limited exceptions. A prospectus is more likely to be
required for a contractual takeover offer, which is an offer to the public for the pur-
poses of the UK Prospectus Regulation, than for a scheme of arrangement. A
scheme of arrangement is not an offer to the public, and so no prospectus is gen-
erally required. A prospectus would be required in respect of a scheme of arrange-
ment, however, if the bidder shares offered as consideration amount to 20 per cent
or more of the relevant class of shares already admitted to trading. An offeror wish-
ing to offer shares or other transferable securities as consideration may, therefore,
consider implementing the takeover by way of a scheme in cases where the new
issuance represents, over a twelve-month period, less than 20 per cent of an exist-
ing listed security. As noted above, however, even below this 20 per cent. threshold
the FCA takes the view that a prospectus is required on a scheme where the offeror
is offering shares as part of a choice of consideration (such as a share or cash alter-
native offer or as part of a mix and match offer).
[618] There are various exemptions from the requirement to produce a prospec-
tus.185 For takeovers involving a securities exchange offer, or mergers, a prospectus
is not required if a ‘takeover exemption document’ is made available that contains
information about the transaction and its impact on the issuer. At present the use-
fulness of the takeover exemption document regime is limited because the UK has
not yet enacted the necessary regulation to prescribe the minimum contents
required for a takeover exemption document, although this may change in the
future.186 (By contrast, the EU has enacted a Delegated Regulation that specifies
the minimum contents.) In the meantime in the UK there is some uncertainty
about what information such a document needs to contain.
[619] An offeror will need to take a number of factors into account in considering
whether to issue a prospectus or a takeover exemption document, including the
uncertainties referred to in the previous paragraph. Most importantly the offeror
184 Also note UK competition legislation and EU competition rules, considered above in the competi-
tion section of Specialist Areas.
185 See the section of Consideration entitled ‘Listed Companies and the Requirement for a Prospectus’
at para. [273] above for further detail.

186 HM Treasury has power to make Regulations specifying items of information that must be included
as a minimum, but no such Regulations have yet been made.
138

will need to consider that when issuing a prospectus, it must publish a supplemen-
tary prospectus if any new factor, material mistake or inaccuracy, which is signifi-
cant for the purposes of investors making an informed assessment of the securities,
arises or is noted between the prospectus being approved by the FCA and the final
closing of the offer or when trading on a regulated market begins (whichever
occurs later). A person who has agreed to subscribe for transferable securities may
withdraw their acceptance within two working days after publication of any supple-
mentary prospectus. This right used to be difficult to reconcile with the City Code
because the City Code restricted shareholders’ rights to withdraw their acceptan-
ces. The Panel has indicated that, in its view, withdrawal rights cannot arise once
the securities offered have been unconditionally allotted.187 The difficulties are
now much reduced because the City Code has been changed to allow shareholders
who have accepted an offer to withdraw their acceptance until the earlier of the
time that the acceptance condition is satisfied and the latest time for the receipt of
acceptances on the ‘unconditional date’ (the date specified by the offeror as the lat-
est date by which all of the conditions to the offer must be satisfied or waived).
[620] Since the departure of the UK from the EU, it is no longer possible for an
offeror that has published a UK prospectus to take advantage of the ‘passporting’
arrangements that allow a prospectus produced within one Member State to be
used throughout the EU without additional approvals or information (except for a
translation of the summary information) being required. In the case of an offer
with a loan note alternative, consideration must be given as to whether the loan
notes will be treated as transferable securities, requiring publication of a prospec-
tus.188 It is common practice for there to be restricted transfer loan notes or non-
transferable loan notes as a means of dealing with this issue.189
[621] When the offeror is a listed company the offeror may, depending on the class
of transaction within which the takeover falls, have to make an announcement or
send an appropriate circular to its shareholders and obtain its shareholders’ prior
approval. As we discussed earlier,190 the Listing Rules classify transactions (includ-
ing certain types of indemnity) by assessing the size of the target company relative
to that of the offeror on the basis of a number of different tests and impose more
onerous obligations the bigger the transaction.
[622] When the target is listed on a regulated market but the offeror is not listed,
the Listing Rules are of more relevance to the target company than the offeror,
because the offeror would not, in such circumstances, be obliged to comply with
their requirements. However, the UK Prospectus Regulation may still be relevant if
the offeror will offer transferable securities (shares or loan notes) as consideration.
187 Panel Statement 2005/29, 30 Jun. 2005.

188 The takeover exemption referred to above is only available in respect of equity securities and is
therefore not available in respect of loan notes.
189 See also Consideration at para. [222] above.
190 See Acquisitions and Disposals by Listed Companies at para. [334] above.
139

3.7.2 The City Code
[623] The City Code is the principal source of regulation of takeover transactions
in the UK. The City Code is made and administered by the Panel and has a statu-
tory basis under Part 28 CA06.
[624] The City Code outlines the conduct to be observed in takeovers and merg-
ers. The City Code currently applies, broadly speaking, when the target company
has its registered office in the UK, the Channel Islands or the Isle of Man if any of
its securities are admitted to trading on a regulated market or a multilateral trad-
ing facility (if the company has approved trading, or requested admission to trad-
ing, of its securities on the relevant multilateral trading facility) in the UK or on any
stock exchange in the Channel Islands or the Isle of Man. The City Code also
applies to public and private target companies that do not have securities traded
on a regulated market, but have their registered offices in the UK, the Channel
Islands, or the Isle of Man and are considered by the Panel to have their place of
central management and control in the UK, the Channel Islands, or the Isle of
Man. The City Code does not apply if the target company is an open-ended invest-
ment company. As discussed below, the City Code applies to only certain types of
private company. The status or residence of the offeror is immaterial.
[625] The City Code will apply to private companies only when:
(1) any of their securities have been admitted to trading on a regulated market
or a multilateral trading facility in the UK (if the company has approved
trading, or requested admission to trading, of its securities on the relevant
multilateral trading facility) or on any stock exchange in the Channel
Islands or the Isle of Man at any time during the ten years prior to the rel-
evant date; or
(2) dealings and/or prices at which persons were willing to deal in any of their
securities have been published on a regular basis for a continuous period
of at least six months in the ten years prior to the relevant date, whether via
a newspaper, electronic price quotation system or otherwise; or
(3) any of their securities have been subject to a marketing arrangement as
described in section 693(3)(b) CA06 at any time during the ten years prior
to the relevant date (e.g., their securities were dealt in on the PSM); or
(4) they have filed a prospectus for the offer, admission to trading or issue of
securities with the registrar of companies or any other relevant authority in
the UK, the Channel Islands, or the Isle of Man (but in the case of any
other such authority only if the filings in on a public record) at any time
during the ten years prior to the relevant date.
[626] In each case, the ‘relevant date’ is the date on which an announcement is
made of a proposed or possible offer for the company or the date on which some
other event occurs in relation to the company which has significance under the City
Code.
140

[627] For companies incorporated in the Isle of Man, the Isle of Man’s Companies
Act 2006 makes no distinction between a public and a private company. A company
with its registered office in the Isle of Man and incorporated there under the Isle of
Man Companies Act 2006, will be treated like a private company for the purposes
of the City Code; so it will only be subject to the City Code if any of the above cri-
teria apply. Similarly, a company having its registered office in Guernsey will only
be subject to the City Code if any of the above criteria apply.
[628] The City Code comprises six general principles and thirty-eight rules (as
well as numerous appendices and notes that aid the interpretation of the rules). Its
objective can be summed up in three underlying concepts:
(1) all shareholders of the same class in a target company must be treated
equally and must have equal and adequate information so that they can
reach a properly informed decision on the bid;
(2) a false market must not be created in the securities of the offeror or the tar-
get company; and
(3) the management of the target company must act in the interests of the
company as a whole and must not deny the holders of securities in the
company the opportunity to decide on the merits of the bid. The thirty-
eight rules, which form the bulk of the City Code, are expansions of the
general principles and contain provisions governing specific aspects of a
takeover.
[629] Both the spirit as well as the precise wording of the City Code are required to
be observed. Such flexibility means that the City Code can also apply in areas or cir-
cumstances which are not expressly covered by any rule. It also means that the rules
can be relaxed when the interests of the general principles so require.
[630] The Panel (its members including representatives of major financial and
business institutions) is generally concerned with the observance of good standards
of commercial behaviour rather than the enforcement of law. It is, however, not
concerned with the financial or commercial advantages or disadvantages of a take-
over, which the Panel regards as matters for the company and its shareholders.
[631] The Panel works on a day-to-day basis through its executive, headed by the
Director General and is responsible for the general administration of the City
Code. The executive is available both for consultation and to give rulings on points
of interpretation before or during takeover transactions.
[632] A knowing or reckless breach of the ‘offer document rules’ or the ‘response
document rules’ in the City Code may be a criminal offence under section 953
CA06. While a breach of other provisions of the City Code is not of itself a criminal
offence or a civil wrong, it may, for example, by misleading the public, constitute a
criminal offence, or it may lead to a public reprimand from the Panel or a compli-
ance ruling or compensation ruling from the Panel or, ultimately, to the facilities of
the securities market in the UK being withheld from the offending party or to the
offending party’s advisers being disqualified from carrying on a regulated financial
services business. The Panel may seek a court order under section 955 CA06 to
141

secure compliance with the City Code. Before making such an order, the court must
be satisfied that a person has contravened, or that there is a reasonable likelihood
that a person will contravene, a rule.191 The standards outlined in the City Code
may also be taken into account by a court in considering whether to attach legal
liability to companies or their directors by reason of lack of care or good faith.
3.7.3 Concepts in the City Code
‘Interests in Securities’
[633] Under the City Code, a person has an ‘interest in securities’ if:
(1) that person has a long economic exposure, whether absolute or condi-
tional, to changes in the price of those securities. In particular, a person
has an ‘interest in securities’ if he or she owns them, has a right or option to
acquire them or call for or obligation to take delivery of them, whether
conditional or absolute, or has a long derivative position in them (or may
have such a position as a result of being party to a derivative); or
(2) that person has the right, whether conditional or absolute, to exercise or
direct the exercise of the voting rights attaching to them or has general
control over them; or
(3) (for the purposes of Rule 5 only (which restricts acquisitions of over 30 per
cent both before and during an offer period)), a person also has an interest
in securities if that person has received an irrevocable undertaking in
respect of them.192
‘Persons Acting in Concert’
[634] For the purposes of the City Code, ‘persons acting in concert’ comprise per-
sons who, pursuant to an agreement or understanding (whether formal or infor-
mal), cooperate to obtain or consolidate ‘control’ of the company or to frustrate the
successful outcome of an offer for a company. Control is defined in the City Code as
meaning an interest, or interests, in shares carrying in aggregate 30 per cent or
more of the voting rights of a company, irrespective of whether such interest or
interests give de facto control.
[635] This involves, unless the contrary is established, a company, its parent, sub-
sidiaries and fellow subsidiaries, and their associated companies and companies of
which such companies are associated companies, all with each other (for this pur-
pose, ownership or control of 20 per cent or more of the equity share capital of a
191 Section 955 was first utilized in Panel on Takeovers and Mergers v King [2018] CSIH 30, the Scottish
Outer House of the Court of Session ordered King to make a mandatory offer for Rangers Interna-
tional Football Club Plc in accordance with Rule 9 of the City Code.
192 See paras [693]–[695] below and Practice Statement 2008/22 – Irrevocable Commitments, Concert
Parties and Related Matters.
142

company is regarded as the test of associated company status). This also includes,
inter alia, a company with any of its directors (together with their close relatives and
related trusts), as well as founding shareholders and/or other shareholders in a pri-
vate company who sell their shares in that company in consideration for the issue of
new shares in a company to which the City Code applies, or who, following the
re-registration of that company as a public company in connection with an initial
public offering or otherwise, become shareholders in a company to which the City
Code applies.
[636] In the context of the City Code, for most purposes, interests in shares in a
target company held by persons acting in concert with the offeror are aggregated
with those of the offeror.
[637] The Panel has a small staff, and the presumptions of concertedness assist
them to manage their workload by requiring certain persons to prove that they are
not acting in concert in a particular case.
[638] It is very difficult to establish that a concert party has been dissolved. The
Panel will require clear evidence that a ‘divorcing event’ has occurred. The Panel
sets a high evidential bar regarding what will qualify as a ‘divorcing event’, particu-
larly where the concert parties are private individuals. The passage of time will not,
generally, be sufficient.
‘Offer Period’
[639] An offer period will commence when the first announcement is made of an
offer or possible offer for a company, or when certain other announcements are
made, such as an announcement that a purchaser is being sought for an interest in
shares carrying 30 per cent or more of the voting rights of the company or that the
board of the company is seeking potential offerors. Subject to the note in para-
graph [641] below, an offer period will end when an announcement is made that an
offer has become or has been declared unconditional, that a scheme of arrange-
ment has become effective, that all announced offers have been withdrawn or have
lapsed or following certain other announcements having been made (such as all
publicly identified potential offerors having made statements that they do not
intend to make an offer for the company).
[640] In the case of a scheme of arrangement, provisions of the City Code that
apply during the course of the offer, or before the offer closes for acceptance, will
apply until it is announced that the scheme has become effective or that it has
lapsed or been withdrawn.
[641] Where an offer is unconditional from the outset, or becomes or is declared
unconditional prior to Day 21 (being the twenty-first day following the date on
which the initial offer document is published), the offer period will nevertheless
continue until Day 21.
143

3.7.4 Legislation
[642] The main statutes in the context of acquisitions of listed companies are
FSMA, the FS Act, the Criminal Justice Act 1993 (CJA), and CA06.
Financial Assistance
[643] Financial assistance is discussed in the section dealing with acquisitions of

private companies, above. As is mentioned in that section, the prohibition on
financial assistance in relation to private companies was repealed from 1 October
2008. The prohibition in relation to public companies remains in force. Moreover,
the replacement legislation in CA06193 broadly re-enacts the existing prohibition
insofar as it relates to public companies.
[644] The following scenarios are prohibited in the context of the acquisition of a
public company:
– a public company giving financial assistance for the acquisition of that com-
pany’s shares;
– a private company giving financial assistance for the acquisition of the shares
of its public parent company; and
– a public company giving financial assistance for the acquisition of the shares
of its public parent company.194
[645] Financial assistance in respect of public companies is permitted within lim-
ited exceptions,195 e.g., when the primary purpose of the assistance is not the
acquisition, or when the assistance is incidental to a larger purpose (although note
that this is narrowly construed),196 lawful dividends, court-sanctioned reductions of
capital and loans in the normal course of business.
[646] Under certain limited circumstances, public companies are also permitted to
give financial assistance if the company’s net assets are not reduced (or, if they are,
if the assistance comes out of distributable profits), for the purposes of an employ-
ees’ share scheme, and for the purposes of loans to employees for the acquisition of
shares.197
[647] Significantly, there is no restriction on a target giving post-acquisition finan-
cial assistance (to reduce or eliminate a liability incurred by the purchaser) if the
target is no longer a public company when the assistance is given. Post-completion
conversion of the target from a public company to a private company will therefore
enable financial assistance to be given.
[648] The financing of a share acquisition by way of debt finance may trigger
financial assistance concerns if the bank seeks security over the assets of the public
193 Sections 677–683 CA06.

194 See Table 4.
195 Sections 678 and 679 CA06.
196 Brady v. Brady [1989] AC 755 (HL).
144

company target (the target thereby giving financial assistance to the purchaser by
way of granting security).
[649] Further specific examples of what might constitute financial assistance in the
context of an acquisition of a public company are as follows.
Fees
[650] In the case of a listed company that receives notice of a bid, it is generally
accepted that the duty of the board under the City Code to obtain and pay for
advice on the bid means that the payment made by the company is not ‘for the pur-
poses’ of the acquisition, but rather for the purposes of discharging the board’s
duty of advising the shareholders. However, the principle almost certainly could
not be applied when the initiative comes from the existing shareholders in order to
obtain an exit.
[651] Prima facie, there would be financial assistance within the meaning of sec-
tions 678 and 679 CA06, if the company were to pay the fees of an adviser to the
offeror. In Chaston v. SWP Group plc,198 the payment of a purchaser’s accountants’
fees by the target company ‘smoothed the path to the acquisition’ and was held to
be financial assistance.199 The payment by the company of a fee in relation to a
transaction that involved simply the purchase of its shares by a trade purchaser
(rather than, for example, by way of a flotation of the company, with the continuing
benefit to the company of obtaining a listing for its shares) would involve a gift and/
or a reduction in net assets. Both a gift and a material reduction in net assets are
examples of financial assistance.
Indemnity
[652] Indemnities are express examples of financial assistance,200 except where
given in respect of default or neglect on the part of the company. It would therefore
be lawful for an indemnity to cover a liability or cost suffered by the adviser when
this was caused by the default or neglect of the company, but not otherwise. The
giving of the usual expense reimbursement provision in an engagement letter
would probably be viewed as a form of indemnity.
198 [2002] EWCA Civ 1999.

199 In Corporate Development Partners LLC v. E-Relationship Marketing Ltd [2007] EWHC 436 (Ch), the tar-
get company had paid fees to a corporate development services provider for the purpose of being
introduced to potential acquisition targets. One of these potential acquisition targets subsequently
purchased the target company. It was held that the fees were not financial assistance for the purchase
of the target company’s shares. In ParOS plc v. Worldlink Group plc [2012] EWHC 394 (Comm) (a case
decided under the CA85 financial assistance provisions), however, a payment expressed to be a
‘break fee’ in respect of a proposed reverse takeover was found to be financial assistance. This was
held to be the case whether the break fee payment was construed to be an indemnity or ‘other finan-
cial assistance’; it was financial assistance because it was ‘a proposed financial payment which
“smooths the path” towards the acquisition of shares’. This does not mean that a break fee will always
be financial assistance; in some circumstances it will be characterized as an ‘inducement’ – see the sec-
tion on ‘Inducement Fees’ below. Break fees are also discussed above.
145

Transaction Bonuses
[653] Transaction bonuses and similar transaction-related benefits paid by the

company to its management are permitted if they are an adequate compensation
for extra work performed. Retention bonuses may be paid by the company if nec-
essary in order to prevent defections of key employees. However, excessive bonuses
or bonuses paid for illegitimate purposes may constitute a breach of financial assis-
tance rules. Any additional transaction-related bonuses should normally be borne
by the selling shareholder rather than the target company.
Management/Leveraged Buy-Out/Merger
[654] In cases in which the acquisition of the target is effected through a leveraged
holding company, there may also be a breach of the financial assistance prohibition
where the target must then use its own assets to repay the money used for the acqui-
sition of its own shares. Furthermore, the provision by the target of any guarantees
or other security to lenders of the holding company may violate financial assistance
rules.
Possible Solutions to the Financial Assistance Problems
[655] Below are examples of how the prohibition on financial assistance may be
avoided.
Treating the Selling Shareholders as the Client
[656] The existing shareholders, as the sellers of the shares, could be treated as the
adviser’s clients, rather than the company itself. However, this would provide its
own problems. For example, if private equity sellers are among the selling share-
holders, they will be reluctant or sometimes unable to warrant information or give
indemnities. Not all of the shareholders may be involved in the discussions relating
to the proposed sale when the engagement is being entered into. There will be dif-
fering credit risks for each of the shareholders. The adviser would also need to sat-
isfy its regulatory duties in relation to each of the shareholders as its clients.
Side Arrangements with Shareholders
[657] One method to avoid the payment of fees and expenses constituting the giv-
ing of financial assistance would be for the fees and expenses to be payable by the
sellers of the shares, although the adviser would be acting for the company rather
than the selling shareholders. The adviser would want to ensure that a procedure is
set up enabling him or her to deduct the fees from the purchase consideration at
the closing of the deal or otherwise to ensure payment. If the transaction were to
abort, the recovery of any fee payable would still amount to the giving of financial
assistance if it were paid by the company rather than the existing shareholders.
146

Separate Engagement or Allocation of Fees
[658] To the extent work carried out by advisers is not strictly related to the trans-
action but has wider operational significance and is in the company’s interest (e.g.,
a pre-closing restructuring), separate formal engagement of the advisers by the
company may help avoid financial assistance issues.
3.7.5 Inducement Fees
[659] As well as financial assistance issues, there are also issues relating to other
types of fees that may be payable in connection with a takeover.
[660] A target company may be asked to enter into an agreement with an offeror
whereby the target agrees to pay a cash sum to the offeror if the offer does not suc-
ceed (an inducement fee), which the offeror may argue to be a necessary condition
to the offeror engaging in an expensive due diligence exercise on the target.
[661] Such inducement fees were previously common, but are now permitted only
in the limited circumstances set out below.
[662] First, where an offeror has announced a firm intention to make an offer
which has not been recommended by the target board, the Panel will normally con-
sent to the target company entering into an inducement fee arrangement with a
competing offeror (a ‘white knight’) at the time of the announcement of its firm
intention to make a competing offer. The aggregate value of the inducement fee or
fees that may be paid by the target company is normally no more than 1 per cent of
the value of the target company calculated by reference to the price of the compet-
ing offer (or, if there are two or more competing offerors, the first competing offer)
and any inducement fee can be paid only if a competing offer becomes or is
declared unconditional. The Panel may give its consent for a target company to
enter into inducement fee arrangements with more than one competing offeror,
subject to the cap on the aggregate value of fees payable described above. The
Panel will not, however, permit the target company to agree an inducement fee with
the first offeror, even if it were to revise its offer to above the value of that of a com-
peting offeror.201
[663] Second, where, prior to an offeror having announced a firm intention to
make an offer, the board of the target company announces that it is seeking one or
more potential offers by means of a formal sale process, the Panel will normally
grant a dispensation to permit the target company to enter into an inducement fee
arrangement (and potentially other forms of ‘offer-related arrangement’, as dis-
cussed in paragraph [696] below) with one offeror (who had participated in that
process) at the time of the announcement of that offeror’s firm intention to make
an offer. Any such inducement fee arrangement will be subject to the same restric-
tions as set out in paragraph [650] above.
201 Takeover Panel Response Statement 2011/1, para. 3.20.
147

[664] Additionally, the Panel has indicated that it might be appropriate to grant a
dispensation to permit a target company to enter into inducement fee arrange-
ments (and potentially other forms of ‘offer-related arrangement’ as discussed in
paragraph [696] below) with an offeror where the target company is in serious
financial distress and where not to grant a dispensation would clearly be detrimen-
tal to the interests of the company’s shareholders. However, this position is not
codified in the City Code.202
[665] The Panel should be consulted at the earliest opportunity in all cases where
its consent to an inducement fee arrangement is required.
3.8 Takeover Offers: Key Provisions of the City Code

3.8.1 Preparation of an Offer
Announcement
[666] Subject to certain limited exceptions, it is the announcement of an offer that

signals the formal commencement of the offer process, because the offer document
must be sent to shareholders of the offeree and persons with information rights
within twenty-eight days of the announcement.203 The City Code allows the use of
electronic forms of communication, including website publication, to send docu-
ments, announcements and information to shareholders and certain other relevant
persons.
[667] So as to avoid there being offers that cannot be implemented and to avoid
the creation of a false market in the shares of the target company and, when rel-
evant, the offeror, General Principle 5 of the City Code provides that an offeror
must announce a bid only after ensuring that it can fulfil in full any cash consider-
ation, if such is offered, and after taking all reasonable measures to secure the
implementation of any other type of consideration.
[668] Rule 1(a) provides that the offer must be put forward in the first instance to
the board of the target company or to its advisers; this means before a public
announcement of the offer is made. In the case of a hostile offer, the relevant com-
munication would ordinarily take place only a few minutes before public announce-
ment, whereas in the context of a recommended offer the period would clearly be
significantly longer.
[669] It is sometimes the case that the City Code requires the making of an
announcement before the parties would otherwise wish. An announcement is
required by Rule 2.2 when, inter alia:
202 Takeover Panel Response Statement 2011/1, para. 3.22.

203 Rule 24.1.
148

(1) following an approach to the target company, the target company is the
subject of rumour or speculation or there is an untoward movement in its
share price. This will be considered in the light of all the relevant facts.
One fact to consider would be the percentage movements of the target
company’s share price (a movement of approximately 20 per cent or a rise
of 5 per cent in the course of a single day would be regarded as untoward
for the purposes of Rule 2.2);
(2) after a potential offeror first actively considers an offer but before an
approach has been made, the target company is the subject of rumour and
speculation or there is an untoward movement in its share price and there
are reasonable grounds for concluding that it is the potential offeror’s
actions (whether through inadequate security, or otherwise) that have led
to the situation;
(3) negotiations or discussions relating to a particular offer are about to be
extended to include more than a very restricted number of people (outside
those who need to know the parties concerned and their immediate advis-
ers). The Panel should be consulted if the offeror and/or the target com-
pany wish to approach this wider group without making an
announcement. The Panel should be consulted prior to more than a total
of six parties being approached about an offer or possible offer, including
potential providers of finance (whether equity or debt), shareholders in the
target or offeror, the target company’s pension fund trustees, potential
management candidates, significant customers and suppliers of the target
company or potential purchasers of assets. The Panel is likely to consent
only in limited circumstances, and the Panel will have to be satisfied as to
the ability of the parties to maintain secrecy;204 or
(4) during an offer period, rumour or speculation specifically identifies a
potential offeror which has not previously been identified in any
announcement. In those circumstances, the Panel will normally require an
announcement to be made by the offeree or the potential offeror (as
appropriate) identifying that potential offeror.
[670] Before the board of the target company is approached, the responsibility for
making an announcement can lie only with the offeror. The offeror should, there-
fore, keep a close watch on the target company’s share price for any sign of unto-
ward movement. Following an approach205 to the board of the target company, the
primary responsibility for making an announcement would normally rest with the
board of the target company who, in turn, must therefore keep a close watch on its
share price. However, if the target company rejects an approach, it will not neces-
sarily know whether the offeror intends to pursue its interest in the possible offer.
Therefore, following an unequivocal rejection of an approach, the practice of the
204 Practice Statement No. 20.

205 In Practice Statement No. 20, the Panel states that it interprets ‘approach’ in this context broadly,
usually considering an approach to have been received when a director or representative of, or an
adviser to, a target company is informed by, or on behalf of, a potential offeror that it is considering
the possibility of making an offer.
149

Panel is to treat the responsibility for making an announcement as reverting to the

offeror.206
[671] Rule 2.4 provides that any announcement made by the target company
which commences an offer period must identify any potential offeror with whom
the target company is in talks or from whom an approach has been received (and
not unequivocally rejected). Further, any subsequent announcement by the target
company which refers to a new potential offeror must identify that potential offeror
unless such an announcement is made after an offeror has announced a firm inten-
tion to make an offer for the target company.
[672] After the date of the announcement in which it is first identified, a potential
offeror is subject to a twenty-eight day deadline by which it must either announce a
firm intention to make an offer or announce that it does not intend to make an
offer; the imposition of this deadline is sometimes called the ‘put up or shut up’
regime.207 The Panel may consent to an extension of the deadline if this is
requested by both the offeror and the target company, and indeed the Panel has
indicated that it will normally consent to an extension in such circumstances. How-
ever, extensions will only be granted when the twenty-eight day period is close to
expiry. The ‘put up or shut up’ twenty-eight day deadline will not apply, or will
cease to apply, to a potential offeror if another offeror has already announced, or
subsequently announces, a firm intention to make an offer for the target company.
In that situation, the potential offeror must announce a firm intention to make an
offer or announce that it does not intend to make an offer by 5 pm on the seventh
day prior to ‘Day 60’.208 Day 60 is the sixtieth day following the publication of the
initial offer document and usually the latest date by which all of the conditions to
the offer must be satisfied or waived; the Panel can in some circumstances extend
Day 60 beyond the sixtieth day by suspending the offer timetable where more time
is needed to obtain an official authorization or regulatory clearance. The Panel will
normally grant a dispensation from the requirement for potential offerors to be
publicly identified and from the twenty-eight day ‘put up or shut up’ deadline
where an offer period commences with an announcement by the target company
that it is seeking one or more potential offerors by means of a formal sale pro-
cess.209
[673] As a consequence of the combination of the requirement that a potential off-
eror is identified in a ‘possible offer’ announcement made under Rule 2.4 and the
twenty-eight day ‘put up or shut up’ deadline, both of which are changes to the City
Code brought about by the 2010 acquisition of Cadbury plc by Kraft Foods Inc,210

207 Rule 2.6(a).
208 Rule 2.6(d).
209 Note 2 on Rule 2.6.
210 See also para. [696] below.
150

bidders must be well prepared in terms of due diligence, financing arrangements

and transaction documentation before the commencement of an offer period.211
[674] When there has been an announcement of a firm intention to make an offer
under Rule 2.7, the offeror must normally make an offer unless the making of the
offer is subject to the prior fulfilment of a specific pre-condition meeting the
requirements of Rule 13.3212 and that particular pre-condition is been met, or the
consent of the Panel has been obtained (see further below). However, with the con-
sent of the Panel, an offeror need not make the offer if a competing offeror subse-
quently announces a firm intention to make a higher offer (Rule 2.7(b)). Where the
offer is for cash, or includes an element of cash, an offeror must, therefore, ensure
that they have all the funding in place to satisfy the offer in full before announcing
a firm intention to make an offer.
[675] During the 2008 takeover of HBOS plc by Lloyds TSB Group plc, the Panel
took the highly unusual step of consenting to an offeror reducing the value of its
offer following the release of an announcement of a firm intention to make an offer.
The revised offer was based on the current market environment and future pros-
pects of the enlarged group and was agreed following discussions with HM Trea-
sury. The Panel’s consent to such revisions represents the exception rather than the
rule.213
[676] Further, a potential offeror should take care in making any statement as to its
future intention or otherwise to make an offer. A person making a statement that
they do not intend to make an offer for a company will normally be bound by that
statement for a period of six months, unless, inter alia, there is a material change of
circumstances or the statement was made outside an offer period and there has
occurred an event which the person specified in the statement as being an event
which would enable the statement to be set aside. The person making the state-
ment should specify in the statement the circumstances in which it reserves the
right to set the statement aside. The Panel should be consulted in advance about
any such statement (Rule 2.8).
[677] Legal and other advisers to target companies should bear in mind that, if no
financial adviser has been appointed by the target company, the Panel will gener-
ally deem the target’s other advisers to assume responsibility for emphasizing to
the target the need for appropriate procedures to be in place in respect of
announcements.214
Secrecy
[678] It is vitally important before the announcement of an offer that absolute

secrecy be maintained. The City Code requires that all persons privy to confidential
211 Under the previous regime, the onus was on the target company to ask the Panel to issue a potential
bidder with a ‘put up or shut up order’ with the result that a potential bidder had six to eight weeks
to make an offer or walk away.
212 See para. [691] below.
213 Announced 13 Oct. 2008.
151

information, particularly price-sensitive information, concerning an offer or con-

templated offer must treat that information as secret and may only pass it to
another person if it is necessary to do so and if that person is made aware of the
need for secrecy (Rule 2.1). If there appears to have been a leak of information, the
Panel will, in assessing whether an announcement is required under Rule 2.2, wish
to learn immediately from the relevant party or its financial adviser what controls
have been put in place in order to keep information secure.215
Contents of an Announcement
[679] Rule 2.7 requires the announcement of the offer to contain a number of mat-
ters, including the terms of the offer, the identity of the offeror and the intentions
of the offeror with regard to the business, employees and pension scheme (or
schemes) of the offeror. The announcement must also set out all the conditions to
which the offer or the making of an offer is subject. The offeror must ensure that all
the conditions of the offer are correct in the announcement, because there will be
no opportunity to change such conditions at a later date.
[680] Parties to an offer are required to make what is termed an ‘opening position
disclosure’, which is an obligation to disclose any long interests and/or short posi-
tions in the target company and, in the case of a securities exchange offer, the off-
eror, within ten business days of the start of the offer period (including interests of
concert parties).
[681] When the offer is for cash or includes an element of cash, Rule 2.7(d) pro-
vides that the announcement must contain a confirmation by the financial adviser
or by another appropriate third party that the offeror has sufficient resources avail-
able to satisfy full acceptance of the offer. The party confirming that resources are
available will not be expected to produce the cash itself if, in giving the confirma-
tion, it acted responsibly and took all reasonable steps to assure itself that the cash
was available.
[682] The offer will typically be subject to a number of conditions. It must nor-
mally be a condition of any offer for voting equity share capital or for other trans-
ferable securities carrying voting rights that it will not be declared unconditional
unless the offeror has acquired or agreed to acquire shares carrying over 50 per
cent of the voting rights in the target company (Rule 10). This rule is disapplied in
the case of a scheme of arrangement, which requires a three-quarters majority in
order to be effective (see paragraph [608] above).
[683] Except in the case of a mandatory offer under Rule 9,216 this condition (the
‘acceptance condition’) is usually drafted so as to be conditional on 90 per cent
acceptances (which would then generally allow compulsory purchase of the bal-
ance) but with the offeror having power to reduce this to shares carrying over 50
per cent of the voting rights. In the case of an offer implemented by way of a
scheme, the offer will usually be conditional upon the scheme becoming effective,

216 See the discussion of mandatory offers, below.
152

which is in turn conditional upon the passing of the resolutions at the shareholder
meetings, the sanction of the scheme by the Court and the registration of the Court
order by the Registrar of Companies.
[684] In addition to the acceptance condition, there will be many other conditions.
Typically, the conditions can be broken down into four broad categories:
a) the acceptance condition (i.e. the minimum level of shareholder accep-
tance of the offer below which the offeror may decline to proceed with
the offer) or, in the case of a scheme of arrangement, the shareholder
approval condition and the court sanction condition;
b) conditions designed to give effect to a legal or regulatory requirement,
or a requirement of the offeror’s articles of association, relating to the
listing and/or admission to trading of the consideration securities or to
the approval of the implementation of the offer by the offeror’s share-
holders;
c) specific or general conditions relation to the obtaining of an official
authorization or regulatory clearance and bespoke conditions relating
to the (non-)occurrence of a specific event or circumstances in relation
to the offeree company; and
d) other conditions, principally general protective conditions (including a
‘material adverse change’ condition.) (Practice Statement 5)
[685] Broadly, an offeror may invoke a condition (or pre-condition) so as to cause
the offer not to proceed, to lapse or be withdrawn, but in the case of categories (c)
and (d) above the offeror can only invoke a condition if the Panel consents. The
Panel will normally only give its consent if the circumstances which give rise to the
right to invoke the condition or pre-condition are of material significance to the
offeror in the context of the offer (the material significance test). This test will be
judged by reference to the facts of each case at the time that the relevant circum-
stances arise. The Panel will take various factors into account, including: whether
the condition was the subject of negotiation with the offeree company; whether the
condition was expressly drawn to offeree company shareholders’ attention in the
offer document of firm offer announcement, with a clear explanation of the cir-
cumstances which might give rise to the right to invoke it; and whether the circum-
stances could not have reasonably been foreseen at the time of the firm offer
announcement and, if they could, the likelihood of the circumstances occurring. In
relation to a condition relating to an official authorization or regulatory clearance,
the Panel will also consider the significance of the authorization or clearance to the
offeror, and what action, if any, the offeror could take in order to obtain the autho-
rization or clearance and the strategic consequences for the offeror if it were to take
that actions; and the consequences for the offeror and its directors if it were to com-
plete the offer without obtaining the authorization or clearance.217
[686] In any event, the conditions of an offer must not depend solely on subjective
judgments by the directors of the offeror or target or on conditions the fulfilment
217 Practice Statement No 5 (revised July 2021).
153

of which is in their hands (Rule 13.1). It should be noted that the terms of any
arrangement or agreement, whether or not in writing, entered into by the offeror
which relates to the circumstances in which it may or may not invoke or seek to
invoke a pre-condition or condition to its offer, and the consequence of it doing so,
will be disclosable unless dispensation is obtained from the Panel.
[687] It is important for offerors to understand that, while they may include ‘mate-
rial adverse change’ conditions in the terms of an offer relating to the continued
wellbeing of the business of the offeree company, the Panel largely restricts an off-
eror’s ability to rely on such conditions in order to lapse its offer. A change in gen-
eral economic, industrial or political circumstances will not justify failure to
proceed with an announced offer.218 In the 2007 offer by CEREP Investment I Sarl
for Freeport plc, CEREP attempted to invoke a material adverse change condition
to avoid its obligation to make its offer for Freeport (having announced its firm
intention to make an offer under the equivalent of Rule 2.7). The Panel decided
that for any material adverse change-style condition to be invoked: (i) the problem
had to be one not reasonably discoverable in due diligence and there had to be a
real possibility that it would transpire; (ii) the value deprivation caused by such a
problem would need to be permanent rather than temporary; and (iii) the drop in
value of the target caused by the problem would need to be very significant. In this
context, the Panel believed that a 25 per cent drop in value would not be suffi-
ciently significant and it might need to be as high as 50 per cent. The threshold for
invoking a material adverse change condition is therefore considerable.
[688] A recent example of the high threshold that must be met before the Panel
will allow a material adverse change clause to be invoked was the 2020 offer by
Brigadier Acquisition Company Limited for Moss Bros Group plc. Brigadier
sought to invoke material adverse change conditions to its offer on account of the
COVID-19 pandemic and associated government measures, but the Panel ruled
that Brigadier had not established that the circumstances were of material signifi-
cance. Although the Panel did not outline its reasoning, it may have been of rel-
evance that the offer was announced on 12 March, by which point the World Health
Organization had already declared COVID-19 a global pandemic.
[689] The press announcement would also invariably set out the offeror’s rationale
for the making of the offer.
[690] If a potential offeror proposes to include in a possible offer announcement
any pre-conditions to the announcement of a firm intention to make an offer, it
must consult the Panel and that possible offer announcement must clearly state
whether or not the pre-conditions must be satisfied before a firm intention to make
an offer can be announced or whether they are waivable, and include a prominent
warning that the offer will not necessarily be made even if the pre-conditions are
satisfied or waived (Rule 2.5(c)).
218 Rule 13.5(a) of the City Code and Panel Statement 2001/15 (6 Nov. 2001). The events of 11 Sep.
2001 were not enough to permit WPP Group Plc to rely on a material adverse change clause condi-
tion and pull out of its bid for Tempus Group Plc. In order for such a clause to be triggered, the
change must be material and adverse in the specific context of the bid.
154

[691] The Panel must be consulted in advance if it is proposed to include a pre-

condition in a firm offer announcement (Rule 13.3). Except with the consent of the
Panel, an offer must not be announced subject to a pre-condition unless the pre-
condition involves an official authorization or regulatory clearance relating to the
offer and either the offeree company agrees to the pre-condition or the authoriza-
tion or clearance is a ‘material official authorization or regulatory clearance’ (i.e.,
where the Panel is satisfied that the failure to obtain the authorization or clearance
could pass the material significance test). Following the announcement of a firm
intention to make an offer, the offeror should use all reasonable efforts to ensure
the satisfaction of any conditions or pre-conditions to the offer (Rule 13.2).
[692] The Panel has confirmed that any attempt to introduce a pre-condition after
announcement of a firm intention to proceed with the offer is manifestly unaccept-
able (subject to very limited exceptions in Rule 32.4 which relate to either increas-
ing or improving an offer or switching to or from a scheme of arrangement).219
Irrevocable Undertakings
[693] Particularly in the case of a recommended offer, and more rarely in the case
of a hostile offer, before the bid is announced an offeror will often seek irrevocable
undertakings from certain key shareholders in the target company, and from target
company shareholder directors, that they will accept the bidder’s offer. An offeror
proposing to contact more than a very restricted number of persons or any private
individual or small corporate shareholder with a view to seeking an irrevocable
undertaking must consult the Panel in advance (Rules 2.2(e) and 4.3). Irrevocable
undertakings may be legally binding in all circumstances (unless and until the offer
lapses) or may cease to apply in the event of a higher offer. However, note the
requirement of absolute secrecy before an announcement of an offer (Rule 2.1).
[694] In contrast to market purchases made before the making of the offer, any
shares acquired pursuant to the undertakings should be treated in the same man-
ner as acceptances of the offer. As a result, obtaining such undertakings will not
make it more difficult to apply the procedures for compulsory acquisition under
sections 974–982 CA06.
[695] Irrevocable undertakings raise some issues in respect of ‘persons acting in
concert’ and ‘interests in securities’ (see paragraphs [634] and [633] above), in par-
ticular, if they include undertakings to vote in a certain way. The Panel has con-
firmed that a shareholder who enters into an irrevocable undertaking to sell shares,
which also includes an undertaking to vote in a certain way, will not normally be
considered to be acting in concert with the offeror provided that the shareholder’s
voting obligation relates only to those resolutions that are required to ensure that
the offer is successful. The Panel has also confirmed that the offeror will not nor-
mally be considered to be ‘interested’ in the shares to which the irrevocable under-
taking relates, and hence that the offeror and shareholder would not normally be
required to make relevant disclosures. However, irrevocable undertakings must be
219 Panel Statement 2008/46.
155

disclosed in their own right under Rule 2.10 (see paragraph [805] below).220 Any
irrevocable undertakings obtained during an offer period must be disclosed by
midday on the following business day. Any irrevocable undertakings obtained prior
to the commencement of an offer period must be disclosed by midday on the busi-
ness day following either the commencement of the offer period in or (in the case
of an offeror) the date of the announcement that first identifies the offeror as such.
No separate disclosure is required when details of irrevocable commitments are
disclosed in a firm or possible offer announcement by the offeror before that dead-
line. Irrevocable undertakings must also be disclosed in the offer document (Rule
24.3) and published on a website (Rule 26).
‘Offer-Related Arrangements’
[696] The 2010 acquisition of Cadbury plc by Kraft Food Inc. led to a public
debate on the UK takeover regime, with some commentators taking the view that
the then-current regime unduly favoured bidders over target companies. After a
period of consultation, the Panel made certain amendments to the City Code with
a view to addressing this imbalance. Chief among the changes to the City Code is
that the Panel’s consent is now required for the target company or any person act-
ing in concert with it to enter into any offer-related arrangement with the offeror or
any person acting in concert with the offeror either during an offer period or when
an offer is reasonably in contemplation (Rule 21.2(a)). An offer-related arrange-
ment is defined as any agreement, arrangement or commitment in connection with
an offer, including any inducement fee arrangement or other arrangement having
a comparable financial or economic effect, and will include break fees and imple-
mentation agreements of the kind that had become customary between a bidder
and a target. Specifically excluded from this definition are commitments to main-
tain the confidentiality of information, undertakings not to solicit employees, cus-
tomers or suppliers, commitments to provide information or assistance for the
purposes of obtaining official or regulatory clearance, irrevocable undertakings or
letters of intent to assent shares to the offer,221 any agreement relating to any exist-
ing employee incentive arrangement, and any arrangement which imposes obliga-
tions only on the offeror (Rule 21.2(b)).222 Certain exceptions to Rule 21.2(a)
relating to ‘white knights’, formal sale processes and companies in serious financial
distress are discussed in paragraphs [698]–[700] above.

221 The Panel has confirmed that irrevocable undertakings provided by directors must not include
-offer-related arrangements ‘by the back door’.
222 The Panel has confirmed in Practice Statement No. 27 that, although Rule 21.2(b)(iv) permits a
shareholder in the target company who is also a director of the target company to enter into irrevo-
cable commitments or letters of intent to accept an offer in relation to their shares in the target com-
pany, the Rule does not permit such an individual to enter into any other type of offer related
arrangement with the offeror or any person acting in concert with it. Provisions which will be
deemed to breach Rule 21.2 include, inter alios, commitments not to solicit a competing offeror, to
recommend an offer to shareholders in the target company, and to notify the offeror if the director
becomes aware of a potential competing offer.
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[697] Irrevocable undertakings are seen as increasingly important to bidders as

these are now effectively the only commitments a bidder can obtain in relation to a
target company prior to making an announcement.
Offers for Other Classes of Shares and Rights in Respect of Shares
[698] When a company has more than one class of equity share capital, a ‘compa-
rable’ offer must be made for each class of equity shares (Rule 14.1), whether such
capital carries voting rights or not. A comparable offer does not need to be identi-
cal, but differences must be capable of being justified to the Panel and the Panel
must be consulted in advance.
[699] No acceptance condition may be attached to a bid for non-voting equity
share capital, unless the bid for the voting equity share capital is itself conditional
on the success of the offer for the non-voting equity share capital.
[700] When the bid is for more than one class of shares, a separate offer must be
made for each class (Rule 14.2).223
[701] Under Rule 15, any convertible securities, warrants, outstanding share
options or other subscription rights must be the subject of an appropriate offer or
proposal. The offer or proposal must be sufficient to ensure that the interests of the
stockholders are safeguarded. Equality of treatment is required and the offer or
proposal should be sent at the same time as the main offer document is published
(the Panel should be consulted if this is not practicable).
[702] Practice Statement No. 24 gives guidance on how an appropriate offer can
be determined for share options and other rights to subscribe, which require the
holder to pay an exercise price for the exercise of the rights. The offer must nor-
mally be made at the ‘see through value’ of the option. For example, if an offeror is
making an offer at 100p per target share, and an option-holder has an option to
acquire target shares at an exercise price of 10p each, the appropriate offer to the
option-holder under Rule 15 should be at least 90p.
Financing Arrangements
[703] It is usual for some or all of the offer consideration to be in the form of cash
(although it is common for at least part of the consideration to be provided in the
form of securities in the offeror). The cash could derive from the offeror’s own
resources but it could also be raised, in whole or in part, by means of an underwrit-
ing of shares in the offeror.
[704] A common method of underwriting in such circumstances is a so-called cash
underpinning in which the offeror effectively arranges for its financial adviser to
223 The Takeover Appeal Board ruling in relation to Eurotunnel plc (Ruling 2007/2) determined that
Eurotunnel shareholders who had travel privileges were not a separate class of shareholders within
the meaning of Rules 14.1 and 14.2 of the City Code. The board held that the travel privileges were
a separate and distinct contract or scheme between Eurotunnel and those shareholders rather than
rights attaching to the shares.
157

make a separate offer to the shareholders in the target company to acquire the
shares in the offeror to which they are entitled as consideration under the offer,
such offer being at a fixed price. Target company shareholders who wish to receive
cash would accept such an offer.
[705] It would also theoretically be possible for an offer to be financed by way of a
rights issue. However, when an offeror proposes to finance a cash offer (or the cash
element of an offer) by an issue of new securities, which would include a rights
issue, the offer can only be made subject to conditions that are required (as a matter
of law or regulatory requirement) in order validly to issue such securities – for
example, the passing of necessary resolutions to allot the new securities – or to have
them listed or admitted to trading. The Panel has made clear that it is not appro-
priate for an offer to be conditional upon any placing, underwriting, or underpin-
ning agreement in relation to the issue of the new securities becoming
unconditional and/or not being terminated.224 There is therefore some difficulty in
using a rights issue to finance an offer, given the risk to the offeror of having to pro-
ceed with the offer even if the rights issue underwriting agreement has been termi-
nated and the related risk to the financial adviser in making its cash confirmation.
Hence, it is rare to finance a takeover by means of a rights issue.
[706] When the offeror funds some or all of the consideration from new bank
facilities, it is necessary, in the light of the requirement of the City Code that the off-
eror be able to implement the offer, that the offeror should have available to it a
loan agreement, limited as to conditionality, at the time of announcement of the
offer, at least when a significant amount of the consideration is to be provided
under that facility.
[707] The financial adviser of the offeror will also be concerned, in the light of its
obligations in relation to cash confirmation,225 that the cash under the facility be
available for the purposes of the implementation of the offer. Accordingly the
financial adviser has an interest in ensuring that the facility is provided on terms
that it will continue to be available until the entire cash consideration under the
offer has been paid, notwithstanding that an event of default may have occurred or
some other right to withdraw the funding may have arisen.
[708] The main reason for providing at least part of the consideration in the form
of securities, even if only as a debt instrument, is to give those UK tax resident tar-
get company shareholders who are liable to taxation on capital gains the opportu-
nity in appropriate circumstances of ‘rolling over’ or ‘holding over’ their gain into
the consideration securities, thus deferring a charge to taxation.
Due Diligence
[709] We considered the matter of due diligence in the context of private acquisi-
tions.226 As regards the acquisition of public companies, the offeror will invariably

225 See the discussion of the contents of the announcement at para. [679] above.
226 See particularly Due Diligence, above.
158

conduct a due diligence exercise in relation to the target company before announc-
ing an offer. This is so as to be able to make a proper commercial assessment of the
target company, as the Panel will not allow the offeror to invoke the conditions of
the offer and withdraw its bid if the offeror could reasonably have ascertained a
problem with the target company by a due diligence exercise.
[710] The extent of the due diligence exercise in the case of a hostile offer will be
limited to reviewing publicly available information, such as the results of searches
of public registers and financial analysts’ reports.
[711] In the case of a recommended offer, the due diligence exercise may be more
extensive, but the target company will often seek to limit its extent, often because it
does not wish the offeror, who may be a competitor, to obtain confidential informa-
tion from it or because it would not wish the information to be made available to an
alternative offeror227 or because the target company wants to ensure that details of
a potential bid are not leaked to the public. For all these reasons, as a matter of
practice, due diligence in public offers is very rarely anything resembling the due
diligence exercise for private sales and is very limited in comparison.
[712] The target company will, prior to handing over any information, ordinarily
insist upon the potential offeror entering into a confidentiality agreement, and it
would also often seek to include in the confidentiality agreement ‘standstill’ provi-
sions. This means provisions restricting, for a specified period, the ability of the
offeror to acquire target company shares without the consent of the board of the
target company. There exist difficult questions of law as to the enforceability of
standstill arrangements. The due diligence exercise may result in the offeror being
in possession of price-sensitive information as regards the target company. This
would prohibit the offeror from dealing in the shares of the target company.228
Asset Sales
[713] In January 2018 the Panel introduced changes to the City Code so that some
asset sales are subject to the City Code. These changes were made in response to
certain deals where bidders who had made offers under the City Code and had sub-
sequently purchased significant assets in the target company instead circumventing
a number of obligations which would otherwise be placed on a bidder.
[714] As a result of these changes: (i) an offeror may not purchase, agree to pur-
chase, or make any statement which confirms the possibility that it is interested in
purchasing assets which are significant in relation to the offeree within six months
from the date of a statement of intention not to make an offer (subject to deroga-
tions contained in Note 2 to Rule 2.8) or during the competition reference period;
(ii) where an offeree announces that it has agreed terms on which it intends to sell
all or substantially all of the company’s asset (excluding cash and cash equivalents)
227 See the discussion of the restraints on action under Rule 21.1 of the City Code in the context of
defences to a hostile offer at para. 783 below.
228 See the discussion of the Criminal Justice Act 1993 and the market abuse regime, below at paras
840–848.
159

and that it intends to return to shareholders all or substantially all of the company’s
cash balances (including the proceeds of any asset sale), a purchaser or potential
purchaser of some or all of those assets must not acquire interests in shares in the
offeree during the offer period unless the board of the offeree has made a state-
ment quantifying the amount per share that is expected to be paid to shareholders
and then only to the extent that the price paid does not exceed the amount stated.
If a range is stated, the price paid must not exceed the bottom of the range; and
(iii) the equality of information to competing offeror obligations has been
expanded to include potential offerors which are in discussion in relation to the
sale of all or substantially all of the offeree’s assets.
3.8.2 Documents from the Offeror and Target Board
Standards of Care and Directors’ Responsibility for Documents
[715] Rule 19.1 requires documents or other information published or statements

made in the course of takeovers to be prepared to the highest standards of care and
accuracy.
[716] The directors of the parties to the takeover must take responsibility for docu-
ments and other information published by their respective companies and the
documents and other information must contain a responsibility statement to that
effect as required by Rule 19.2. This will also apply to any offer-related information
published on a CD-ROM or website. The inclusion of such a statement may expose
directors to liability for negligent misstatement as regards the shareholders to
whom the takeover documents are addressed.
[717] Rule 20.5 states that advertisements relating to the offer are prohibited
except for advertisements which: (i) only contain factual information in relation to
the offer and not any argument or opinion in relation to the offer; or (ii) are
required or specifically permitted by the FCA rules (or the equivalent rules of
another jurisdiction).
[718] Rules 19.5 and 19.6 regulate statements made by the parties to an offer
relating to any particular course of action that they commit or intend to take, or not
take, after the end of the offer period. Rule 19.5 on post-offer undertakings
requires a party to an offer to comply with the terms of any post-offer undertaking
it makes for the period of time specified in the undertaking, and to complete any
course of action it committed to take by the specified date. A party would be
excused compliance with the terms of its post-offer undertaking only if a qualifica-
tion or condition set out in the undertaking applies. Rule 19.6 on post-offer inten-
tion statements requires a post-offer intention statement made by a party to be
both an accurate statement of that party’s intention at the time that it is made and
made on reasonable grounds. Parties to an offer are required to publish reports on
post-offer undertakings and post-offer intention statements given during the
course of an offer, at the end of the twelve-month period from the date on which
160

the offer period ends and, in the case of a post-offer undertaking that has a dura-
tion of longer than a year, such reports are required to be published at least annu-
ally.
General Obligation as to Information
[719] Rule 23 together with General Principle 2 of the City Code provides that
shareholders must be given sufficient information and advice to enable them to
reach a properly informed decision as to the merits or otherwise of an offer and the
information must be available early enough to enable shareholders to make a deci-
sion in good time (but note that there is no requirement to publish a profit fore-
cast). The obligation of an offeror in these respects towards the target company’s
shareholders is no less than the obligation towards its shareholders.
[720] Rule 27.1 provides for the updating of certain information where there has
been a material change in information previously published during an offer
period.
The Offer Document
[721] The offer document, which contains the formal offer to the shareholders of
the target company, or, in the case of a scheme of arrangement, the scheme circu-
lar, must normally be sent to shareholders of the target company and persons with
information rights within twenty-eight days of the announcement of a firm inten-
tion to make an offer (Rule 24.1).229,230 Note that, in the case of a scheme of
arrangement, the scheme circular will be issued by the target, not the offeror (see
Table 6 in paragraph [609] above). It should be remembered, as described in para-
graph [672] above, that, unless on the application of the offeror and with the con-
sent of the target company the Panel agrees to an extension, a potential offeror is
subject to a twenty-eight day ‘put up or shut up’ deadline following the date of the
announcement in which it is first identified by which it must announce a firm inten-
tion to make an offer or announce that it does not intend to make an offer.
[722] An offer document in a contractual offer will ordinarily contain a letter from
the offeror making the offer and setting out its commercial terms and, when the
offer is recommended, a letter from the chairperson of the target company. The
offer document is accompanied by a form of acceptance which can be used by
shareholders of the target company to accept the offer.
[723] On a takeover implemented by way of a scheme of arrangement, the scheme
document will take the place of a recommended offer document, and accordingly
must satisfy the City Code rules applicable to both an ‘offer document’ and the first
major circular from the target board, the required contents of which are set out in
229 In December 2008, the Panel refused to grant an extension to this twenty-eight-day period, stressing
the importance of treating a Rule 2.7 announcement as a firm commitment to make an offer (Panel
Statement 2008/46).
230 An offeror must not publish an offer document for fourteen days from the announcement of its firm
intention to make an offer without the consent of the board of the offeree.
161

Rules 24 and 25. In addition, the scheme document, being a circular from the tar-
get company to its shareholders, will also need to comply with the requirements of
LR 13.3 (Contents of all Circulars), and section 897 CA06 (including an explana-
tion of the effect of the proposed transaction).
[724] The City Code lays down detailed requirements as to the content of an offer
document (whether a traditional offer document or a scheme document), some of
which are discussed below. References in this section to the ‘offer document’ refer
both to contractual offer documents and to scheme documents.
[725] The offer document must contain the offeror’s intentions regarding the
future business of the target company and explain the long-term commercial justi-
fication for the offer, its intentions with regard to the continued employment of the
employees and management of the target company and of its subsidiaries (includ-
ing any material change in the conditions of employment), its strategic plans for
the target company (and their likely effect on employment and business locations),
its intentions regarding employer contributions into the target company’s pension
scheme(s),231 including with regard to current arrangements for the funding of any
scheme deficit, the accrual of benefits for existing members, and the admission of
new members and its intentions with regard to any redeployment of fixed assets. It
must also state the offeror’s intentions with regard to maintaining any existing
trading facilities for the relevant securities of the target company. If the offeror has
no intention to make any changes in relation to the target company’s employees,
strategic plans, employer contributions into the pension scheme or fixed assets, or
it considers that its strategic plans for the target company will have no repercus-
sions on employment or the location of the target company’s places of business, the
offeror is required to make a statement to that effect (Rule 24.2). The offeror must
also publish reports on its intentions going forward (see paragraph [718] above).
[726] Rule 24.3(a) sets out the financial and other information about the offeror
which must be contained in the offer document where the offeror is a UK listed
company. This information is required irrespective of whether the consideration
includes securities or is in cash only. Information must also be given on the same
basis in respect of the target company (Rule 24.3(e)).
[727] The offer document must also include details of the ratings and outlooks
publicly accorded to the offeror and the target company by any rating agency prior
to the commencement of the offer period, any changes made to those ratings or
outlooks during the offer period and prior to the publication of the offer docu-
ment, and a summary of the reasons given, if any, for those changes (Rule 24.3(c)).
In addition, the offer document must contain a description of how the offer is to be
financed and the sources of the finance, including details of the amounts of each
facility or instrument, repayment terms, interest rates, security and key covenants
(Rule 24.3(f)).
231 The pension schemes to which the provisions of the City Code apply are any funded scheme spon-
sored by the company or any of its subsidiaries which provides benefits, some or all of which are on
a defined benefit basis, and which has trustees (or, in the case of a non-UK scheme, managers).
162

[728] The offer document must include an estimate of the aggregate fees and
expenses likely to be incurred by the offeror in connection with the offer and sepa-
rate estimates of the fees and expenses expected to be incurred in relation to the
following: financial and corporate broking services, financing, legal advice,
accounting advice, public relations advice and other professional services. If a fee is
variable between defined limits, a range must be given for each category, setting
out expected maximum and minimum amounts payable. Where the fees and
expenses within a particular category are expected to exceed the estimated maxi-
mum amounts disclosed, or the amounts actually paid exceed the estimated maxi-
mum amounts disclosed, in either case by 10 per cent or more, the Panel must be
informed and the Panel may require this information to be publicly announced
(Rule 24.16).
[729] When the offeror is not a listed company, it should disclose the information
required of a listed offeror so far as is appropriate and any further information that
the Panel may require (Rule 24.3(b)).
[730] When the offeror is a subsidiary company, the Panel will normally look
through unlisted subsidiaries in interpreting Rule 24.3 unless, with the agreement
of the Panel, the subsidiary in question is regarded as being of sufficient substance
in relation to the group and the offer. If the offeror is part of a group, information
will normally be required on the ultimate holding company in the form of group
accounts.
[731] Rule 24.4 requires certain interests, short positions and dealings in securities
to be disclosed,232 including in respect of target company securities held by the off-
eror and target company securities in which directors of the offeror or any other
persons acting in concert with the offeror are interested. In the case of a securities
exchange offer only, the equivalent information in respect of offeror securities
must also be disclosed.
[732] The offeror must have sufficient funds to be able to implement the offer in
full. Rule 31.8 requires settlement of the consideration (in respect of acceptances
which are complete in all respects) within fourteen days of the first closing date or,
if later, the date upon which the offer becomes or is declared wholly unconditional.
In respect of a scheme, paragraph 10 of Appendix 7 to the City Code provides that
consideration must be sent to shareholders within fourteen days of the scheme
effective date.
Defence Document
[733] Normally within fourteen days of the publication of the offer document, the
target board must circulate its opinion on the offer to its shareholders, persons with
information rights and employee representatives and must make the document
readily available to the trustees of its pension scheme(s) (Rule 25.1). This opinion
must include the target board’s views on the effects of the implementation of the
offer on all the company’s interests, including employment, and on the offeror’s
232 This area is also regulated by DTR 5.
163

strategic plans for the target company (Rule 25.2(a)). The provisions of the City
Code do not limit the factors that the board of the target company may take into
account in giving its opinion on the offer in accordance with Rule 25.2(a) and, in
particular, the board of the target company is not required by the City Code to con-
sider the offer price as the determining factor. The target board must make known
in the document circulated the substance of the advice given to it by its indepen-
dent advisers (Rule 25.2(b)). If the bid is recommended (including if made by way
of scheme of arrangement), this information is all included in the offer document.
If not, such views will be published in the defence document. If the board is split in
its views as regards an offer, the directors who are in a minority should also publish
their views. The Panel will normally require that the minority views be circulated by
the target company. Where the board of the offeree receives in good time before
publication of its circular on the offer, the circular must also have appended: (i) a
separate opinion from the employee representatives of the company on the effects
of the offer on employment; and (ii) an opinion from the trustees of any pension
scheme(s) on the effects of the offer on the pension scheme(s),233 provided in each
case such opinion is received in good time before the publication of the document.
If any such opinion is not received in time but is received subsequently, the target
company must publish it on a website and publicly announce that it has been so
published, provided it is received no later than fourteen days after the offer becom-
ing or being declared wholly unconditional (Rule 25.9).
[734] The target board must provide its shareholders in good time with all the facts
necessary to enable them, taking into account the recommendation of the target
company board and the target company’s financial advisers, to make an informed
decision whether to accept the offer. Rule 25 sets out the requirements for the con-
tent of the first major circular from the target company board. These include
requirements as to disclosure of certain interests, short positions and dealings and
also directors’ service contracts and estimates of the fees and expenses expected to
be incurred by the target company in connection with the offer (giving the same
level of detail described in relation to the offeror’s fees and expenses in paragraph
[728] above).
[735] Rule 25.3 provides that the first major circular published by the target board
in connection with an offer must contain all known material changes in the finan-
cial or trading position of the target company which has occurred since the last
financial period for which audited accounts, a preliminary statement of annual
results, a half-yearly financial report or interim financial information has been
published, or must state that there are no known material changes.
Part 7 of the FS Act and Section 21 of FSMA
[736] Provisions of the criminal law back up the requirement for documents not to
be false or misleading.
233 See footnote 230 above for the pension schemes to which this provision of the City Code will apply.
164

[737] We have already discussed Part 7 of the FS Act in the context of private acqui-
sitions;234 this is no less relevant in the context of acquisitions of public companies.
[738] In terms of section 21 of FSMA, the FCA’s view is that communications in the
course of a takeover are likely to be exempt from the financial promotions regime,
which provides that, as a general rule, no invitation or inducement to engage in
investment activity may be issued unless it is issued or approved by a person who
has been authorized under FSMA.
[739] As noted above, under section 953 CA06, there is now also potential criminal
liability for failure to comply with the City Code’s content requirements for offer
documents and defence documents.
Market Abuse: UK MAR
[740] The FCA has the power to impose penalties on any person who commits
‘market abuse’ in respect of, inter alia, securities traded on the London Stock
Exchange. See paragraphs [814]– [818] below for a summary of the market abuse
regime.
Payments to Directors
[741] There is an obligation to disclose in the offer document certain special
arrangements connected with or dependent upon the offer, including details of
any termination payments that the offeror has agreed to make to the target direc-
tors, unless otherwise agreed by the Panel (Rule 24.6). Under sections 215–226
CA06, approval of the target’s shareholders will also be required unless the pay-
ment is made in good faith in discharge of an existing legal obligation, by way of
damages for breach of such an obligation, by way of settlement or compromise any
claim arising in connection with the termination of a person’s office or employ-
ment, or by way of a pension in respect of past services.
3.8.3 Defences to a Hostile Offer
Restraints on Action under the City Code
[742] Rule 21 together with General Principle 3 of the City Code provide that the
target board should not, without the approval of shareholders in general meeting
and having obtained competent independent advice, during the course of an offer,
or earlier if it believes a bona fide offer might be imminent, act as follows:
– take any action which may result in any offer or bona fide possible offer being
frustrated or in shareholders being denied the opportunity to decide on its
merits;
234 See above, for example, the discussion of deliberate non-disclosure in relation to the disclosure exer-
cise in Contractual Protection, and the consideration of the information memorandum in Auction
Sales.
165

– issue any shares or transfer or sell, or agree to transfer or sell, any shares out
of treasury, or issue or grant options in respect of unissued shares;
– create or issue, or permit the creation or issue of, any securities carrying
rights of conversion into, or subscription for, shares;
– sell, dispose of or acquire, or agree to sell, dispose of or acquire, assets of a
material amount (10 per cent of assets is suggested by the City Code as a
guideline of what would be material, although this percentage could be lower
for an asset of particular significance); or
– enter into contracts other than in the ordinary course of business, for
example, for the significant enhancement of a director’s terms of service.
[743] The Panel should be consulted and may grant its consent to proceed without
a shareholder meeting where: (i) the proposed action is in pursuance of a contract
entered into earlier or another pre-existing obligation; (ii) a decision to take the
proposed action had been taken before the beginning of the period covered by
Rule 21 that has been partly or fully implemented before the beginning of that
period or which, despite the decision not being so implemented, is in the ordinary
course of business; (iii) the taking of the proposed action is conditional on the offer
being withdrawn or lapsing;235 (iv) the offeror consents to the action proposed to
be taken by the board of the offeree; or (v) holders of shares carrying more than 50
per cent of the voting rights of the offeree state in writing that they approve the
proposed action and would vote in favour of any resolution to that effect proposed
at a general meeting. Transactions of minor significance individually may be
deemed frustrating action when aggregated under Note 2 to Rule 21.1.
[744] The common law on directors’ duties along with the duty to promote the suc-
cess of the company under section 172 CA06 mean that directors of the offeror and
of the target company must always, in advising their shareholders, act only in their
capacity as directors and not have regard to their personal or family shareholdings
or to their personal relationships with the companies. It is the shareholders’ inter-
ests taken as a whole, together with those of employees and creditors, which should
be considered when the directors are giving advice to shareholders.
[745] It is of particular importance that Rule 3.1 obliges the board of the target
company to obtain competent independent advice on any offer; this will ordinarily
be from an investment bank. In determining the independence of an adviser, the
Panel will look to the strength of the overall relationship between the adviser and
the target, including the level of fee income generated from the relationship (and
its significance to the adviser’s group), and the previous and current matters on
which the adviser has advised, or is advising, the target. In Practice Statement
235 Where the Panel has agreed to disapply Rule 21.1(a) on the grounds that the proposed action is con-
ditional on the offer being withdrawn or lapsing, the board of the offeree must publish an announce-
ment containing the details set out in Note 1 to Rule 21.1(a) including: (i) full details of the proposed
action; (ii) the opinion of the board of the offeree on the proposed action and the board’s reasons for
forming its opinion; (iii) if applicable, the substance of any advice given to the board of the offeree as
to whether the financial terms of the proposed action are fair and reasonable; (iv) information about
the current status of the offer or possible offer; and (v) any other information necessary to enable
shareholders to make an informed decision.
166

No. 21, the Panel recognizes that it is increasingly likely that an adviser would be
currently acting, or has in the recent past been acting in some capacity for a target
company, given the increasingly global reach of parties to offers and of financial
advisers. The Panel has therefore indicated that it is likely now to be more flexible
in determining independence. An adviser to the target company who is rewarded
on failure of an offer will normally be disqualified from acting as an independent
adviser, due to a conflict of interest (Note 3 to Rule 3.3).
[746] Other provisions of the City Code are also relevant to the conduct of a bid
defence. For example, if the target company has previously provided information
to one offeror or potential offeror then, by virtue of Rule 20.1, the same informa-
tion must be given to another offeror or bona fide potential offeror if it requests
such information. The Panel has stated that Rule 20.1 will apply when there is a
public announcement of the bid or in a situation when there is a potential first off-
eror and a potential second offeror is informed authoritatively of the existence of
the first potential offeror, irrespective of the source of this information.236
[747] In addition, during the offer period, financial advisers and stockbrokers
(and persons controlling, controlled by or under common control with them) to the
target group or its associated companies are prohibited from purchasing target
shares and entering into other specified arrangements relating to a purchase of
such shares unless the Panel has given its consent (Rule 4.4).
Practical Implications
[748] A number of defensive tactics that might be prevalent in some jurisdictions
are not so in the UK. For example, so-called poison pills, whereby it is ensured that
a target company cannot be bid for or can only be bid for on unattractive terms,
could not be adopted by the board of directors of a target company, first, because,
in all but a most extreme case, to do so would be a breach of fiduciary duty as well as
section 172 CA06 and, second, as a result of the provisions of General Principle 3
and Rule 21 of the City Code. Also, when the poison pill would involve amending
the capital structure of the target company or the rights attaching to its share capi-
tal, the consent of the company’s shareholders would be required prior to imple-
mentation. However, it is not the case that there can be no action to prevent an
unwelcome offer by the board of a target company. The board can, for example,
take steps to ensure that, to the extent possible, it has the support of its major
shareholders.
[749] Once an offer has been made, the extent to which action by the target com-
pany board is permitted depends upon the view which it has properly formed of
the offer. If, for example, the board has properly formed the view that the offer, if
successful, would be damaging to the target company, then it might be possible
(within the constraints of Rule 21) to take steps to frustrate the offer, for example,
by seeking to persuade a relevant regulatory authority that a consent required in
236 Panel Statement 2000/8 and Rule 20.1 of the City Code.
167

order for the offer to proceed should not be given (e.g., the 1989 offer by Hoylake
for BAT).
[750] On the other hand, the Panel has taken the view that the bringing of litiga-
tion to frustrate an offer would not be permitted (e.g., the 1989 offer by Minorco
for Consolidated Goldfields).
[751] A further possibility is that the board of the target company forms the view
that the offer does not value the target company sufficiently highly. In such circum-
stances, the target company will seek to persuade its shareholders as to the value of
the target company. This may involve the preparation of a profit forecast or an
asset valuation (covered by Rules 28 and 29 respectively). Other legitimate means
of persuading the shareholders of the target company of the company’s value
would be, for example, the defensive measure of promising shareholders the pay-
ment of a special dividend in the target company should the offer fail or, alterna-
tively, to effect a repurchase of its share capital should the offer fail. Such proposals
do not contravene Rule 21. Where part of the consideration being offered by the
offeror is shares in the offeror, it would be common for a target company to argue
that such shares are less valuable than they might at first sight appear.
3.8.4 Timing
[752] The City Code contains detailed rules relating to the timing of offers.
Among these are that:
– as noted above, a potential offeror will normally be subject to a twenty-eight
day ‘put up or shut up’ deadline following the date of the announcement in
which it is first identified by which to announce a firm intention to make an
offer or announce that it does not intend to make an offer;
– an offer document must normally be sent within twenty-eight days of the
announcement of a firm intention to make an offer (Rule 24.1). Where the
firm intention to make an offer is announced subject to one or more pre-
conditions, the Panel will normally require the offer document to be pub-
lished within twenty-eight days of the last remaining pre-condition being
either satisfied or waived (Note on Rule 24.1);
– in the case of a contractual offer, the offer must normally be open for accep-
tance for at least twenty-one days after it is published (Rule 31.2);
– the target company’s directors must normally advise shareholders and per-
sons with information rights of their views within fourteen days after the offer
document is published (Rule 25.1). Where the offer is recommended, this
will usually be incorporated into the same document as the offer document
or, on a scheme, into the scheme document;
– in the case of a contractual offer, any new information to be published by the
target company must be published not later than Day 39, which is twenty-one
days prior to Day 60 (Rule 31.8, which does not apply to schemes). See below
for the definition of Day 60;
– a contractual offer may not normally be increased later than the fourteenth
day prior to Day 60;
168

– a contractual offer must normally remain open for acceptance for a further
fourteen days after it has become unconditional as to acceptances (Rule 31.4,
which does not apply to schemes), as must offers of alternative forms of con-
sideration (Rule 33, which does not apply to schemes), although, if certain
conditions are satisfied, this does not apply to ‘mix and match’ offers nor to
cash alternatives by way of cash underpinnings237 when the value of the cash
underwritten alternative is, at the time of announcement, more than half the
maximum value of the offer; and
– on a contractual offer, except with the consent of the Panel, all of the condi-
tions to a contractual offer must be satisfied or waived, or the offer must
lapse, by midnight on Day 60. Day 60 means the sixtieth day after the offer
document is published but this can be extended by the Panel (Rule 31.3,
which does not apply to schemes). The offeror who wishes to set an earlier
date as the date by which all of the conditions must be satisfied or waived
(known as the ‘unconditional date’) must consult with the Panel in advance.
[753] In respect of contractual takeover offers, the Panel will normally extend Day
60 beyond the sixtieth day in certain circumstances, including (i) if a competing
firm offer has been announced, (ii) if the board of the offeree company consents to
the extension, and (iii) to suspend the offer timetable in order to give the offeror
more time to satisfy one or more conditions relating to a material official authori-
zation or regulatory clearance (Rule 31.3). If a condition relating to an official
authorization or regulatory clearance has not been satisfied or waived by Day 37,
the Panel will normally suspend the timetable either (i) at the joint request of the
offeror and offeree company or (ii) at the request of either party provided that the
Panel is satisfied that the failure to obtain the authorization or clearance could give
rise to circumstances which are of material significance to the offeror in the context
of the offer. The suspended timetable will resume on the date the last condition
relating to a relevant official authorization or regulatory clearance is satisfied or
waived, at which point the timetable resets with that day normally becoming the
twenty-eighth day prior to the new Day 60.
[754] If a competing offer has been announced, Day 60 for both offerors will nor-
mally be set by reference to the publication of the later offer document (Note 1 on
Rule 31.3). If a competitive bid situation continues to exist in the later stages of the
offer period, the Panel will normally require revised offers to follow an open auc-
tion procedure determined by the Panel,238 although it will consider any alterna-
tive procedure agreed between the competing offerors and the board of the target
company (Rule 32.5). When there are two or more competing offers and the offer
timetable of one is suspended, the offer timetable will normally be suspended for
all the offerors and will normally only resume when it is resumed by the last offeror.
Alternatively, an offeror may bring forward the unconditional date of its offer by
making an acceleration statement (Note on Rule 31.4).
237 See the discussion of financing arrangements, above.

238 See the new Appendix 8 for the auction procedure.
169

[755] The ability of the Panel to suspend the offer timetable for a contractual offer
opens up the possibility that the offer timetable could become in effect open-ended
and incapable of being brought to an end. This might occur if there was a signifi-
cant delay in the expected timetable for the obtaining of an official authorization
or regulatory clearance and no clear deadline for the regulatory authority to make
its decision, or where the offeror was unable or unwilling to waive the relevant con-
dition. In addition, the offeror might have secured financing for its offer only for a
specified period, which might be shorter than an unexpectedly long timetable sus-
pension. In order to protect an offeror from this situation, the Code provides that
an offeror must set a ‘long-stop date’ for its offer after which the offer will lapse if
sufficient acceptances have not been received or, with the consent of the Panel, if a
condition relating to an official authorization or regulatory approval has not been
satisfied or waived. Where an offer is recommended by the offeree company, the
long-stop date will be agreed between the offeror and offeree. This is consistent
with the way in which an offeror is able to agree on a long-stop date with the offeree
company on a scheme of arrangement (i.e. the date stated in the scheme circular to
be the latest day by which the scheme must become effective and included as such
in the terms of the scheme.) Where the offer is not recommended, the Panel must
be consulted as to the appropriate long-stop date; it will normally be no earlier
than the date by which the last condition relating to an official authorization or
regulatory clearance is reasonably expected to be satisfied (Rule 12.1).
[756] The offeror may lapse its offer on the long-stop date if insufficient acceptan-
ces have been received. If sufficient acceptances have been received but the offeror
still wishes to lapse its offer because a condition relating to an official authorization
or regulatory clearance has not been satisfied or waived, the Panel’s consent is
required to lapse the offer. The Panel will need to be satisfied that failure to obtain
the outstanding authorization or clearance would be material to the offeror in the
context of the offer and that either:
a) it is not sufficient clear what action would be required to be taken in
order for the authorization or clearance to be obtained; or
b) if it is sufficient clear, the taking of that action would give rise to cir-
cumstances which are of material significance to the offeror in the con-
text of the offer (Rule 12.2).
[757] If a question as to whether the Panel will give its consent for the offer to be
lapsed remains unresolved on the long-stop date, the offeror will normally have to
keep its offer running pending the final determination of the issue. Where the
Panel decides that the necessary remedial action is sufficiently clear and does not
satisfy the material significance requirement in Rule 13.5(a), the offeror will nor-
mally be expected to waive the outstanding condition and declare its offer uncon-
ditional.
[758] After making its offer, an offeror can make an acceleration statement to
bring forward the unconditional date to a date that is earlier than Day 60 (Rule
31.5). An offeror can also specify an unconditional date which is earlier than Day
60 in its initial offer document but must consult with the Panel in advance; it will
normally then be treated as having made an acceleration statement (Rule 31.1).
170

The offeror must state in the acceleration statement that it is waiving all unsatisfied
conditions relating to any official authorizations or regulatory clearances. This is to
prevent an offeror from using an acceleration statement to shorten the timetable so
that it comes to an end before all the relevant clearances and authorizations can be
obtained, as a way of getting out of an offer that it has made.
[759] On a contractual offer, the Code does provide for one limited route for an
offeror to get out of an offer it has made. An offeror can publish a notice, known as
an ‘acceptance condition invocation notice’ specifying that it intends to invoke the
acceptance condition so as to cause its offer to lapse on a specified date. The date
must be on or after Day 21 and earlier than the unconditional date, and must be at
least fourteen days after the date of the notice in order to give offeree company
shareholders enough time to accept the offer if they wish to do so. If on the speci-
fied date the required level of acceptances has not been received then the accep-
tance condition is treated as incapable of being satisfied and the offer lapses.
However, if the required level of acceptances has been received, the offer contin-
ues; the acceptance condition will not be regarded as having been satisfied until all
other conditions to the offer are satisfied or waived (Rule 31.6).
[760] Except with the consent of the Panel, when an offer has been announced and
has been withdrawn or lapsed, neither the offeror nor any person who is or was act-
ing in concert with the offeror may, within twelve months from the date on which
such offer is withdrawn or lapses, make an offer for the offeree company, put itself
in a position whereby it would be obliged under Rule 9 (described in paragraph
[775] below) to make an offer or make any statement which raises or confirms the
possibility that an offer might be made (Rule 35.1). This is to prevent an offeror
from putting a target company under continual siege.
[761] The notes to Rules 35.1 and 35.2 specify circumstances in which the Panel
will normally grant consent for a further offer to be made notwithstanding that the
twelve-month period has not elapsed. These include:
– when the new offer follows the announcement by a third party of a firm
intention to make an offer for the target company;
– when the new offer is recommended by the board of the target company,
although in this case consent will not normally be granted within three
months of the lapsing of an earlier offer in circumstances when the offeror
was prevented from revising or extending its previous offer as a result of mak-
ing a no increase statement or a no-extension statement; or
– where the Panel determines that there has been a material change of circum-
stances.
Revision of the Offer
[762] In a contractual offer, the offeror may choose to revise its offer at any time up
to Day 46, i.e. the fourteenth day prior to Day 60 (Rule 32.1). In a scheme of
arrangement, the offeror may revise its offer up to and including the date fourteen
days before the date of the shareholder meetings to approve the scheme (Para-
graph 7 of Appendix 7).
171

[763] An offeror will be obliged to revise its offer in certain circumstances, for
example, where Rule 11 requires a cash offer to be made or where the offeror pur-
chases shares above the offer price (Rule 6.2). However, an offeror making a con-
tractual takeover offer may not use the circumstances in which it is obliged to make
a revised offer as a method to revise after Day 46 (Note 3 to Rule 32.1).
3.9 Dealing and Disclosure Requirements Prior to an

Offer Announcement and During an Offer Period
[764] The City Code is concerned primarily with voting rights. It is also concerned
in some cases with other interests in securities and derivatives.
[765] Note that all references in this section to an offeror should be read as refer-
ences to the offeror and/or all persons ‘acting in concert’ with it (as to which, see
paragraph [634] above).
[766] The ‘offer period’, as referred to below is the period that commences when
the first announcement is made of an offer or possible offer for a company, or when
certain other announcements are made, such as an announcement that a purchaser
is being sought for an interest in shares carrying 30 per cent or more of the voting
rights of the company or that the board of the company is seeking potential offer-
ors. The offer period will end when an announcement is made that an offer has
become or has been declared unconditional as to acceptances, that a scheme of
arrangement has become effective, that all announced offers have been withdrawn
or have lapsed or following certain other announcements having been made (such
as all publicly identified offerors having made a statement that they do not intend
to make an offer under Rule 2.8). Where an offer is unconditional from the outset,
or becomes or is declared unconditional as to acceptances prior to the first closing
date, the offer period will nevertheless continue until the first closing date (City
Code: Definitions section).
3.9.1 Stakebuilding and Dealings
Acquisitions Prior to an Offer
[767] If an offeror has acquired an interest in shares in the target company:
(1) within a three-month period prior to the commencement of the offer

period; or
(2) between any announcement of a possible offer and the announcement of a
firm intention to make an offer; or
(3) prior to the period referred to in (1), if the Panel is of the view that there
are circumstances which render it necessary to ensure that all holders of
the same class of securities in the target company are afforded equivalent
treatment,
172

then, except with the consent of the Panel in relation to (1) or (2) above, any sub-
sequent offer by such offeror for that target company must be on no less favourable
terms (Rule 6.1). If an acquisition of an interest in shares in the target company has
given rise to an obligation under Rule 11 (see below) compliance with the obligation
under Rule 11 will normally satisfy the obligation under Rule 6.1.
Acquisitions under 30 per cent
[768] An offeror may attempt to enhance the prospects of its offer ultimately being
successful by acquiring target company shares prior to making its offer. However,
where the target company’s shares are listed the offeror must comply with any obli-
gations relating to notification and disclosure of holdings of voting rights set out in
the DTRs.239
Acquisitions over 30 per cent Before and During an Offer Period
[769] The City Code contains detailed provisions concerning acquisitions of inter-
ests in shares to which are attached 30 per cent or more of voting rights, in view of
the fact that such interests give rights of (de facto) control.
[770] As mentioned below in the context of mandatory offers, if an offeror is inter-
ested in shares which in aggregate carry less than 30 per cent of the voting rights in
the target company, the offeror may not acquire an interest in any other shares car-
rying voting rights in the target company that, when aggregated with the shares in
which it is already interested, would carry 30 per cent or more of the voting rights
in that company. Furthermore, when an offeror is interested in shares carrying 30
per cent or more but less than 50 per cent of the voting rights in the target com-
pany, it may not acquire an interest in any other shares carrying voting rights in
that company (Rule 5.1).
[771] However, Rule 5.2 provides that acquisitions are not restricted by the above
if:
(1) the purchase is from a single holder and it is the only acquisition within a
seven-day period. (However, this exception will not apply where the pur-
chaser has announced a firm intention to make an offer); or
(2) the purchase immediately precedes, and is conditional upon, the
announcement of an offer which is publicly recommended by, or the pur-
chase is made with the agreement of, the board of the target company; or
(3) the offeror has announced a firm intention to make an offer, provided that:
(a) the purchase is made with the agreement of the target company’s
board; or
(b) the offer (or any competing offer) has been publicly recommended by
the target company’s board; or
(c) Day 21 of that offer or of any competing offer has passed; or
(d) the offer has become unconditional.
239 See the section on ‘Disclosure’, below at para. [791].
173

(4) the purchase is by way of acceptance of the offer; or

(5) either:
(a) the acquisition follows a reduction in the acquirer’s holding from more
than 30 per cent but not to less than 30 per cent, and the acquisition
does not exceed the limits in Note 11 to Rule 9.1; or
(b) holders of shares carrying 50 per cent or more of the voting rights have
stated that they will not accept the offer or one person holds shares car-
rying 50 per cent or more of the voting rights (Note 5 on the Dispen-
sations from Rule 9).
[772] For the purposes of Rule 5 only, ‘interests in shares’ includes irrevocable
undertakings to accept the offer. The scope of Rule 5 therefore contrasts with that
of the mandatory bid provisions (Rule 9), which do not cover irrevocable undertak-
ings; the interplay of the two rules means that a bidder can obtain irrevocable
undertakings over 30 per cent or more of the target’s voting shares where permit-
ted by Rule 5 (most significantly, where the offer is recommended) without trigger-
ing the mandatory offer provisions under Rule 9.
Sale of Securities during the Offer Period
[773] An offeror must not during the offer period sell any securities in a target
company without having obtained the prior consent of the Panel.
[774] Twenty-four hours’ public notice must be given of any such proposed sale.
Once the announcement has been made, an offeror may not acquire an interest in
any securities of the target company and the Panel will only allow the offer to be
revised in exceptional circumstances (Rule 4.2(a)).
Mandatory Offers (A Rule 9 Offer)

[775] Notwithstanding that purchases may be permitted as considered above,240 if
either:
(1) the offeror acquires (whether or not pursuant to a series of transactions or

over a period of time) an interest in shares which, together with shares in
which the offeror is already interested, carry 30 per cent or more of the vot-
ing rights in a target; or
(2) where the offeror is interested in shares which in aggregate carry 30 per
cent or more but less than 50 per cent of the voting rights in a target com-
pany, and the offeror acquires an interest in any other shares which
increases the percentage of shares carrying voting rights in which it is
interested,
240 See the discussion relating to acquisitions over 30 per cent both before and during an offer period,
above.
174

then the offeror will, except with the consent of the Panel, be required to make a
‘mandatory offer’ to acquire all of the classes of equity share capital (whether voting
or non-voting) and transferable securities carrying voting rights in the target com-
pany not already owned by it.
[776] The following must be noted in relation to a mandatory offer:
(1) the offer is permitted to be conditional only upon the level of acceptances
referred to in (2) below.
(2) the acceptance condition is that only acceptances are required which,
together with shares acquired or agreed to be acquired before or during
the offer, will result in the offeror holding shares carrying more than 50
per cent of the voting rights in the target company; and
(3) the offer must be for cash or accompanied by a full cash alternative at not
less than the highest price paid by the offeror for any interest in target
company shares of the relevant class within the preceding twelve months.
[777] Except with the consent of the Panel, no acquisition of any interest in shares
which would result in the obligation to make a mandatory offer may be made if the
implementation of such offer might depend on the passing of a shareholder reso-
lution of the offeror or any other conditions, consents or arrangements. The Panel
will normally only grant such a dispensation if the share purchase agreement relat-
ing to the acquisition is made subject to a condition relating to a material official
authorization or regulatory clearance, which is also included as a condition or pre-
condition to the offer, and to no other conditions. Immediately upon entering into
the share purchase agreement, the offeror must make an announcement of the
offer, after which the offeror must use all reasonable efforts to ensure the satisfac-
tion of the condition to the share purchase agreement. The terms of the share pur-
chase agreement must provide that the condition relating to the relevant
authorization or clearance may only be invoked with the consent of the Panel. In
line with its usual treatment of regulatory conditions, the Panel will only give con-
sent to invoke the condition if the circumstances which give rise to the right to
invoke the condition are considered by the Panel to be of material significance to
the offeror in the context of the offer.
[778] In relation to Rule 9, we should also note that when an issue of new securities
by the target company would otherwise result in an obligation to make a mandatory
offer, the Panel will normally waive the obligation if there is a vote to that effect at a
shareholders’ meeting of the offeree company (a so-called ‘whitewash’). Only inde-
pendent parties would be entitled to vote at that meeting.241
[779] The Panel will not normally give a waiver if the person to whom the new
securities are to be issued has purchased shares in the company in the twelve
months prior to the publication of the circular relating to the proposals.
241 See n. 1 on dispensations from Rule 9 of the City Code.
175

[780] Any acquisition resulting in a mandatory offer becoming required must be

immediately followed by an announcement that such an offer is to be made (Rules
2.2(b) and 7.1).
Required Cash Offer
[781] If:
(1) an offeror acquires, for cash, during an offer period and within the twelve
months prior to its commencement, interests in shares carrying 10 per
cent or more of the voting rights of a class of shares in a target company; or
(2) the offeror acquires any interest in target company shares for cash during
the offer period; or
(3) in the view of the Panel (whose opinion should be sought in any event) it is
necessary to ensure that all target company shareholders of the same class
are afforded equivalent treatment (the Panel will not normally exercise this
discretion unless the sellers or other parties to the transactions giving rise
to the interests are directors of, or other persons closely connected with,
the offeror or target company in which case even relatively small purchases
may be relevant),
then, except with the consent of the Panel in relation to (a) or (b) above, any offer
for the relevant class of shares in the target company not already held must be
made in cash or with a full cash alternative at not less than the highest price paid by
the offeror during the offer period (and in the case of (a) above, the preceding
twelve months) (Rule 11.1).
[782] Any such purchase must, if appropriate, be immediately followed by an
announcement that an appropriately revised offer is to be made (Rule 7.1).
Required Securities Offer
[783] If:
(1) an offeror acquires, in exchange for securities, during an offer period and
within the three months prior to its commencement, an interest in shares
which carry 10 per cent or more of the voting rights in the target company;
or
(2) an offeror acquires, in exchange for securities, more than three months
prior to the offer period, an interest in shares which carry less than 10 per
cent of the voting rights of the target company, but in the view of the Panel
it is necessary to ensure that all target shareholders are treated similarly
(the Panel will not normally exercise this discretion unless the sellers or
other parties to the transactions giving rise to the interests are directors of,
or other persons closely connected with, the offeror or target company in
which case even relatively small purchases may be relevant),
176

then the offeror will normally be required to offer such securities to all other hold-
ers of the ordinary shares in the target company on a same number basis (Rule
11.2).
[784] There will also be an obligation to make a cash offer or provide a cash alter-
native (see above) unless any consideration securities are to be held until either the
offer has lapsed or the offer consideration has been sent to all accepting sharehold-
ers (Rule 11.2).
Purchases above the Offer Price
[785] If an offeror acquires an interest in shares above the offer price, such offeror
must increase its offer to not less than the highest price paid (Rule 6.2).
Special Deals with Favourable Conditions
[786] Except with the consent of the Panel, an offeror may not make any arrange-
ments with some shareholders or persons interested in shares carrying voting
rights either during an offer or when one is reasonably in contemplation, if there
are favourable conditions attached which are not being extended to all sharehold-
ers (Rule 16). This includes a promise to make good to a seller of shares any differ-
ence between the sale price and the price of any subsequent successful offer and an
irrevocable undertaking to accept an offer coupled with the granting to target com-
pany shareholders of a ‘put option’ over the target company shares should the offer
fail.
Compulsory Acquisition of Minority Shareholders

[787] If the takeover has been implemented by way of contractual offer and the
offeror wishes to exercise rights under sections 979–982 CA06 compulsorily to
acquire minority holdings, 50 per cent in value of ‘the shares to which the offer
relates’ and (where those shares are voting shares) not less than 90 per cent of the
voting rights carried by those shares must be acquired.
[788] If an offeror acquires or contracts to acquire shares in a target company prior
to the time at which it makes (and not just announces) an offer, then such shares are
not shares to which the offer relates and may not, therefore, be counted towards the
numerator or denominator of this 90 per cent acceptance condition (sections
974(2) and 975(1) CA06).242
[789] If, however, an offeror acquires or unconditionally contracts to acquire
shares during the period within which the offer can be accepted (i.e., after it is
made, not just announced), then those shares can be counted towards the numera-
tor or denominator of this 90 per cent acceptance condition, provided that:
– the consideration for the acquisition does not exceed the value of the offer;
or
242 However, see the discussion relating to irrevocable undertakings, above.
177

– if it does exceed the value of the offer, the terms of the offer are increased up
to at least the consideration for the acquisition (sections 977 and 979(8)–(10)
CA06).
[790] Minority shareholders have two balancing rights of lesser practical impor-
tance. First, they can apply to the court for an order that the offeror may not
acquire their shares or must alter the terms on offer (section 986 CA06). Such
applications would only succeed in exceptional circumstances and are extremely
rare in practice. Second, the minority may require the offeror to purchase their
holdings on the terms of the offer once 90 per cent in value of the target company’s
voting shares (or shares of the relevant class), carrying not less than 90 per cent of
all voting rights (or voting rights of that class) have been acquired, whatever the
method of acquisition.243 This enables dissenting shareholders to resist the take-
over until the eleventh hour without risking retention of a holding which has little
more than nuisance value. When alternative types of consideration were available
under the offer, even if subsequently closed, they must again be made available to
those whose shares are compulsorily acquired in this way.
3.9.2 Disclosure
Increases and Decreases in a Holding of Shares
[791] Under Chapter 5 of the DTRs, which were made to implement the major
shareholding provisions of the EU Transparency Directive (2004/109/EC), a person
must notify the issuer of securities listed on a UK regulated market (and in the case
of UK public companies, certain other prescribed markets) of the percentage of its
voting rights if the percentage of voting rights which that person holds as share-
holder244 or through that person’s direct or indirect holding of ‘qualifying financial
instruments’ (or a combination of such holdings):
(1) reaches, exceeds or falls below 3 per cent and each 1 per cent threshold
thereafter up to 100 per cent (or in the case of a non-UK issuer on the basis
of thresholds at 5 per cent, 10 per cent, 15 per cent, 20 per cent, 25 per
cent, 30 per cent, 50 per cent, and 75 per cent) as a result of an acquisition
or disposal of shares or ‘qualifying financial instruments’; or
(2) reaches, exceeds, or falls below an applicable threshold in (1) as a result of
events changing the breakdown of voting rights calculated on the basis of
the total share capital information disclosed monthly by the issuer under
the DTRs. This is subject to an exception for issuers in other countries that
have been deemed to have equivalent disclosure requirements.
243 For non-voting shares, the threshold is 90 per cent in value of all target company shares (or shares of
the relevant class) (s. 983 CA06).
244 The FCA Handbook gives a wide meaning to ‘shareholder’ for the purposes of Ch. 5 of the DTR (see
the FCA Handbook glossary). In particular, it catches indirect holdings of shares, which under DTR
5.2.1R includes holdings via controlled undertakings, nominees, trusts and proxies.
178

[792] The issuer must make public (by announcement) the information notified to
it.
[793] ‘Qualifying financial instruments’ are those financial instruments (as
defined in the DTRs) that result in an entitlement to acquire under a formal agree-
ment, on the holder’s own initiative alone, existing issued shares of the issuer to
which voting rights are attached.
[794] While enforcement actions for breaches of DTR 5 are rare, the FSA in August
2011 fined Sir Ken Morrison, the former chairman of WM Morrison Supermarkets
plc, GBP210 000 for delaying required notifications when his holding of voting
rights fell below applicable thresholds.
Disclosure of Dealings by Parties to a Takeover
[795] Any dealings in relevant securities by the parties to a takeover and by an

exempt principal trader connected with the offeror or target company during the
offer period must be disclosed on a daily basis to a Regulatory Information Service
in typed format by fax or electronic delivery. A copy must also be sent to the Panel
in electronic form not later than 12:00 noon on the following business day (Rule 8).
Public disclosures should be made on a dealing disclosure form available from the
Panel. If details included in a dealing disclosure are incorrect, they should be cor-
rected as soon as practicable in a subsequent disclosure. This is in addition to the
requirement for parties to an offer to make an opening position disclosure (see
paragraph [680] above) and in addition to the requirement for the offeror to make
regular announcements of the number of acceptances of its offer (see below).
[796] When such a dealing is for the account of non-discretionary clients or is for
the account of discretionary investment clients and is by an exempt fund manager
connected with the offeror or target company, it need only be disclosed to the
Panel.
[797] ‘Relevant securities’ broadly means securities in the offeror or target com-
pany or derivatives of such securities and includes:
(1) any securities of the target company that are being offered for, or that carry
voting rights;
(2) equity share capital of both the target company and the offeror;
(3) securities of an offeror that carry substantially the same rights as any to be
issued as consideration for the offer; and
(4) securities of the target company and an offeror that carry conversion or
subscription rights into any of the above (City Code: Definitions section).
[798] ‘Principal trader’ is a person registered as a market-maker with a recognized

investment exchange, or is accepted by the Panel as a market-maker, or is a mem-
ber firm of a recognized investment exchange dealing as principal in order book
securities. An ‘exempt principal trader’ is a trader recognized as such by the Panel.
[799] ‘Exempt fund manager’ is a person who manages investment accounts on a
discretionary basis and is recognized as such by the Panel.
179

[800] The requirements relating to the ‘opening position disclosures’ that must be
made at, or shortly after the commencement of, an offer period are discussed int
paragraph [680] above.
Disclosure of Dealings by 1 per cent Shareholders
[801] During the offer period, if any person (whether or not an offeror) is, or as a
result of a transaction will be, interested, either directly or indirectly, in 1 per cent
or more of any class of relevant securities of either the target company or any secu-
rities exchange offeror, that person or any other person through whom the interest
is derived must report any dealings during the offer period in relevant securities of
the target company, or any securities exchange offeror, to a Regulatory Information
Service in typed format by fax or electronic delivery not later than 3.30 pm on the
following business day (Rule 8.3). A copy of such disclosure must also be sent to the
Panel in electronic form. Public disclosures should be made on a Dealing Disclo-
sure Form available from the Panel.
[802] Two or more persons who act to acquire an interest in relevant securities pur-
suant to an agreement or understanding (whether formal or informal) will be
deemed to be a single person for these purposes.
[803] If a person manages investment accounts on a discretionary basis, that per-
son, and not the person on whose behalf the relevant securities (or interests in rel-
evant securities) are managed, will be treated as interested in the relevant securities
concerned.
[804] These requirements do not apply to recognized intermediaries acting in a
client-serving capacity. A ‘recognized intermediary’ is part of the trading opera-
tions of a bank or securities house, accepted by the Panel as such.
Disclosure of Irrevocable Undertakings and Letters of Intent

[805] During an offer period, if an offeror or target company procures an irrevo-
cable undertaking or a letter of intent to accept or not to accept an offer, the offeror
or target company (as appropriate) must disclose the details in accordance with the
procedure described above (Rule 2.10).
Disclosure of Acceptance Levels
[806] During an offer period, the offeror must make frequent announcements stat-
ing the number of shares for which acceptances of the offer have been received
(specifying how many of those have been received from concert parties and as a
result of irrevocable undertakings or letters of intent) and include a prominent
statement of the number and percentage value of shares which the offeror may
count towards its acceptance condition (Rule 17).
180

Prohibited Dealings
[807] An offeror must not deal as principal with an exempt principal trader con-
nected with the offeror in relevant securities (as defined above) of the target com-
pany during the offer period (Rule 38.2).
[808] Interests in target company securities must not be acquired by the offeror
through any anonymous order book system or through any other means, unless (in
either case) it can be established that the seller or other party to the transaction is
not an exempt principal trader connected with the offeror. If this cannot be estab-
lished, any acquisitions must be effected by negotiated dealings (Rule 4.2(b)). As
trading through the Stock Exchange Electronic Trading Service (SETS) is anony-
mous, acquisitions must take place outside SETS.
Insider Dealing: CJA
[809] Both the offeror and the investment bank will be prevented from making
market purchases of the target company’s shares if they have inside information
relating to the target company’s shares other than the fact that the offer is to be
made.245
[810] Briefly, under the insider dealing provisions contained in the CJA, an indi-
vidual may commit a criminal offence if that individual deals, or encourages
another person to deal, in securities of a company on the basis of inside informa-
tion which has not been made public and which, if made public, would significantly
affect the price. For example, when the offeror has secured inside information
about the target company in negotiations with the target company, or when an
informal clearance has been secured from the relevant regulator of a utilities sector,
market purchases would not be permissible until the particular item of information
is made public. A person may also commit the offence of insider dealing by the dis-
closure of inside information to another person other than in the proper perfor-
mance of the function of their employment, office, or profession.
[811] A person guilty of insider dealing is liable, on summary conviction, to a fine
or imprisonment for a term not exceeding six months or to both or, on conviction
on indictment, to a fine or imprisonment for a term not exceeding seven years or to
both.
[812] Responsibility for investigating and instituting proceedings against a person
or firm for insider dealing lies with the FCA, the Secretary of State or, in certain cir-
cumstances, the Serious Fraud Office. These bodies have agreed guidelines to
decide which of them should investigate and prosecute cases of insider dealing.
[813] The FCA has a set of principles of good practice, as developed by the FSA,
for the handling of inside information.246 Although voluntary, these principles are
aimed at entities which are not subject to the DTRs, or to FCA or other regulators’
245 See the discussion above at para. [709], relating to due diligence.
246 FSA Market Watch, Issue No. 27, June 2008.
181

rules, and are intended to set out policies and procedures for handling inside infor-
mation. The principles are supported by the Panel.247
Market Abuse: UK MAR
[814] Under UK MAR, the following types of behaviour can amount to market
abuse:
(1) engaging or attempting to engage in insider dealing;

(2) recommending that another person engage in insider dealing or inducing
another person to engage in insider dealing;
(3) unlawfully disclosing inside information; or
(4) engaging or attempting to engage in ‘market manipulation’.
[815] Market manipulation involves the following:
(1) entering into a transaction, placing an order to trade or carrying out any
other behaviour that:
(a) gives, or is likely to give, false or misleading signals as to the supply of,
demand for, or price of, a financial instrument; or
(b) secures, or is likely to secure, the price of one or several financial instru-
ments at an abnormal or artificial level;
(2) entering into a transaction, placing an order to trade or carrying out any
other behaviour which employs ‘fictitious devices or any other form of
deception or contrivance’;
(3) disseminating information through the media, including the internet, or
by any other means, which gives, or is likely to give, false or misleading sig-
nals as to the supply of, demand for, or price of, a financial instrument or is
likely to secure, the price of a financial instrument at an abnormal or arti-
ficial level, including the dissemination of rumours, where the person who
made the dissemination knew, or ought to have known, that the informa-
tion was false or misleading; and
(4) transmitting false or misleading information or providing false or mislead-
ing inputs in relation to a benchmark where the person who made the
transmission or provided the input knew or ought to have known that it
was false or misleading, or any other behaviour which manipulates the cal-
culation of a benchmark.
[816] The standard of proof necessary to impose a penalty for market abuse is the
civil standard of the balance of probabilities, but it is flexible in its application. The
more serious the allegation, or the more serious the consequences if the allegation
is proved, the stronger the evidence required before the allegation will be found to
have been proved on the balance of probabilities. The practical result of this where
182

a financial penalty is being considered is that, although the civil standard applies,
the result is likely to be the same as if the criminal standard applied.
[817] Under Article 14 of UK MAR, save for limited circumstances described
therein, it is unlawful for a party to disclose inside information and, therefore, dis-
cussions between the offeror and holders of securities in the offeree prior to the
offer period can constitute an offence. UK MAR, however, provides a safe harbour
for ‘market soundings’ to the offence of unlawfully disclosing inside information.
Market soundings (also known as ‘pre-marketing’) comprise the communication of
information, before the announcement of a transaction, to one or more potential
investors in order to gauge interest. The market sounding safe harbour will apply
provided certain disclosure and record-keeping conditions set out in Article 9 are
met. For example, before conducting a market sounding, the issuer must specifi-
cally assess whether the market sounding will involve the disclosure of inside infor-
mation. Before disclosing such inside information, the issuer must also: (i) obtain
the consent of the person to whom the disclosure is made to receive inside informa-
tion; and (ii) inform that person that they will be restricted by UK MAR from trad-
ing or acting on that information and that they will be obliged to keep the
information confidential.
[818] MAR extends the scope of market abuse beyond that of UK regulated mar-
kets. UK MAR applies to any financial instruments traded on a multilateral trading
facility or an organized trading facility in the UK or EU. In December 2017 the
FCA imposed a fine of £70,000 on Tejoori Limited, an AIM-listed company, for not
informing the public as soon as possible of inside information in breach of Article
17(1) UK MAR.
183

184

CORPORATE ACQUISITIONS AND MERGERS IN THE UNITED KINGDOM

Corporate Acquisitions and

Mergers in the United Kingdom
THIRD EDITION
CORPORATE
Derived from Kluwer’s multi-volume Corporate Acquisitions and Mergers, the largest and most
ACQUISITIONS
detailed database of M&A know-how available anywhere in the world, this work by a highly
experienced partner in the leading international law firm Slaughter and May provides a
concise, practical analysis of current law and practice relating to mergers and acquisitions of
public and private companies in the United Kingdom. The book offers a clear explanation of
AND MERGERS IN
each step in the acquisition process from the perspectives of both the purchaser and the seller.
Key areas covered include: structuring the transaction; due diligence; contractual protection;
consideration; and the impact of applicable company, competition, tax, intellectual property, THE UNITED KINGDOM
environmental and data protection law on the acquisition process.
Corporate Acquisitions and Mergers is an invaluable guide for both legal practitioners and
business executives seeking a comprehensive yet practical analysis of mergers and acquisitions
in the United Kingdom.
THIRD EDITION
Equivalent analyses of M&A law and practice in some 50 other jurisdictions, all contributed
by leading law firms, are accessible on-line at www.kluwerlawonline.com under Corporate

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NILUFER VON BISMARCK OBE

CORPORATE ACQUISITIONS AND MERGERS IN THE UNITED KINGDOM

Corporate Acquisitions and

NILUFER VON BISMARCK OBE

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Nilufer von Bismarck OBE

This book was originally published as a chapter in Corporate

General Editor: Peter Begg

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Sold and distributed by:

Printed on acid-free paper

e-Book: ISBN 978-94-035-3600-2

© 2021 Kluwer Law International BV, The Netherlands

Printed in the United Kingdom.

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2 Private Acquisitions .......................................................... 4

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3.3.11 Acquisitions and Disposals by Listed

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Slaughter and May

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Accounting Regula- Large and Medium-sized Companies and Groups

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HMRC HM Revenue & Customs

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TUPE Regulations Transfer of Undertakings (Protection of Employment)

1 Subject to the Protocol on Ireland/Northern Ireland.

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Seller gives purchaser Seller repeats

2.1.2 The Type of Acquisition: Shares or Assets?

2 See the employment section of Specialist Areas, below.

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[10] Although, in theory at least, an acquisition of shares as opposed to assets is

[14] In contrast, purchasers often prefer to proceed by way of asset purchases

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Hive-downs and hive-ups

[15] The ‘hive-down’ and ‘hive-up’ represent a hybrid of share/asset deals. On a

4 See the tax section of Specialist Areas, below.

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2.1.3 Summary of Legislation and the Regulatory Framework5

Distinguishing Between Companies

[18] A company may be unlimited, limited by guarantee or limited by shares (the

Statutory Control over Corporate Acquisitions

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15 Chapter 3 of Part 28 CA06.

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The European Dimension

3.1 Heads of Agreement, Confidentiality Undertakings,

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Table 1 Heads of Agreement: Main Points

Subject of – shares/assets to be bought or sold

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Warranties and – general approach to be adopted

3.1.2 Confidentiality Undertakings

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[40] Confidentiality undertakings on the part of the purchaser may be contained

Table 2 Confidentiality Agreement: Key Provisions

Definition of ‘confiden- – information which is included

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