Steve Plaskitt, Partner at MHA Tait Walker gives his expertise on agreeing corporate deals and how comparisons can be made with the recent US elections.
The recent US Election and its aftermath have shown that it is important not just to get your campaign right but to understand the rules of the election and to agree them on all sides before the voting and the counting can start, so that we may all understand quickly and smoothly the final result. This has similarities to how corporate deals are struck and documented and the rules that deal with any fall out afterwards.
Firstly, the US Election is by its nature divisive as there can be only one winner and the way that aggressive personal campaigns were reported by the media widened divisions. As an outsider looking on from the UK, it seemed that both sets of supporters could not find common ground on what was an agreed truth during the campaign.
Secondly, the rules that oversee the election process appear to have been misunderstood and are different in many states, so the intervention of the courts was required to clarify this. All of this does little to resolve the confusion and allow a divided nation to move on and work together.
In a corporate deal, establishing the truth is a vital part of the process and gives comfort to both the buyer and the seller that there is nothing being hidden from either party. It is achieved throughout the due diligence and disclosure processes. These reinforce goodwill between teams that will often have to work closely together afterwards.
This goodwill is established by a rigorous process of financial, legal and commercial due diligence where the buyer reviews the company accounts, asks detailed questions of the seller and undertakes their own investigations and calculations to seek to check key assumptions about how the businesses can work together afterwards. The due diligence process may typically take around three months with any findings openly discussed between both parties, further investigated and if necessary, the proposed deal price should be amended or greater protection should be conceded to the buyer. Occasionally one party will walk away from the deal if differences cannot be resolved. The seller should walk if they are confident that they have other potential buyers, whether trade buyers or a management but out team, who are waiting in the wings or if they have a better realistic alternative e.g. to stay with, commit to and grow the business.
At the same time as the due diligence is proceeding the legal contract that explain all the rules connected with the deal are being drafted and negotiated typically in a Share Purchase Agreement (“SPA”). This covers not only the price paid for the business and when it is paid and but also:
– the warranty and indemnity clauses that give protection to the buyer if the seller has given any misinformation; and
– the accounting rules that govern the preparation of any completion accounts.
Warranty and indemnity clauses are where the seller makes contractual promises which if they later prove to be false after the deal has completed, allows the buyer some remedy and compensation, the quantity of which is decided through the courts or explicitly agreed with the sellers in the SPA. Furthermore, a lengthy disclosure process before the deal is signed allows the vendors to record in writing any specific issues that may impact the warranties e.g. the exceptions to these promises given in the SPA. This disclosure letter is important to protect the sellers as it is very difficult for them to be sued after the deal for matters that were properly disclosed to the buyer.
Completion accounts are often important to agree the final deal price and typically there is an amount of the price held back for a two month period to allow time for the accounts to be prepared, reviewed and agreed and for the final settlement payment to be paid. Completion accounts are determined by the accounting policies stated in the SPA. These are generally the policies that have been used in its most recent accounts to the extent that they agree with the UK’s generally accepted accounting policies and also specific accounting policies that will have been included in the SPA to avoid any misunderstandings at a later date.
Very rarely there will be misunderstandings and to the extent that these cannot be agreed in an amicable manner by the buyer and the seller, then an accounting expert would be required to be appointed to determine the final position. Again, all of this is documented in the SPA.
Fortunately fall-outs after the corporate deal has been concluded are rare and the good corporate finance adviser and the legal process would seek to eliminate or minimise the potential for disagreements. However where the price being paid is not paid all at completion, and perhaps where there is an earn out, inevitably there are cases where the buyer may be reluctant to pay further consideration particularly if their business has not performed as they had been led to believe before the deal.
Increasingly. an aggressive, misleading or adversarial approach to corporate deal making is becoming out of favour and a collaborative, thorough and transparent approach between the parties is seen as better for all sides as it establishes a ‘common truth’ and builds the goodwill to ensure that the combined businesses can work together more smoothly and flourish.
Only the courts and time will tell how the polarised positions of both Republicans and Democrats will evolve and how America will work together and I, and many others in the UK, will follow this avidly as it will undoubtedly have an impact on the UK’s trading relationship with the USA, with our UK economy post Brexit and eventually on North East companies.
Steve Plaskitt is Partner at MHA Tait Walker Corporate Finance and has helped numerous businesses with company sales and growth strategies. He has twenty-five years of experience in the North East deals market. For more information please call 0191 285 0321 or email steve.plaskitt@taitwalker.co.uk
