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Share Sale
• Ownership of Business doesn’t change
• Ownership of Company changes
Shares
Buyer Shareholders
consideration
Ownership
Company
Running
Buyer Company
Cash
Running
Business
VAT
• If transfer of going concern then VAT doesn’t apply to transfer – Art 5 VAT (Special Provisions) Order 1995
• If simply assets, then this is a supply of goods/services and would attract VAT
Employees
Asset sales
• Transfer of Undertakings (Protection of Employment) regulations 2006 doesn’t normally apply whereas they would if sold as
going concern
• If TUPE doesn’t apply (which it won’t if only assets transferring) then common law rule applies which means:
o If seller redeploys employees then OK
o If doesn’t then contracts terminated and seller liable to employees i.e wrongful /unfair dismissal
Scope of warranties
• Likely to be wider on a share sale
• On a business sale all contingent tax liabilities will remain with seller so no such warranties needed
• Investigation into affairs more rigorous on a share sale
Transfer of title
• Shares
o Simple stock transfer form
o Pre-contract investigation will be more rigorous
• Business (Assets to constitute going concern)
o Each separate asset must be individually transferred
o Complications
Landlord consents to assignment
Delivery of assets
Transfer of intellectual property rights
Employees
• Shares
o No change of employer since target company is employer before and after change of control
o Seller no longer has direct interest/liability except in relation to warranties given to the buyer in the acquisition
agreement
• Business (Assets to constitute going concern)
o Responsibility passes to the buyer under Transfer of Undertakings (Protection of Employment) regulations 2006
(TUPE)
o NB - If just a few assets and not a going concern then TUPE won’t apply and seller remains liable
Taxation factors
• Shares: direct receipt of consideration
o Sale of shares makes shareholder liable to CGT
o Seller may benefit from the ‘disposing of substantial shareholding exemption’ under TCGA 1992 if:
- both the Seller and the company in which the shares are being sold (i.e. the subsidiary of the seller) are trading
companies, AND
- the Seller has held at least 10% of the shares of the company being sold for continuous period of at least 12
months in previous 2 years
• Business: two tier taxation (Assets to constitute going concern)
o (1) Selling company suffers Corporation tax on sale of business
Disposal of capital assets may give rise to chargeable gain
If assets sold for more than written down value this may result in positive balancing charge which are treated as
income receipts
o (2) Charge when proceeds of sale (after tax) are distributed to shareholders; EITHER:
If net proceeds distributed on a winding up then shareholders are effectively making a chargeable disposal for
CGT purposes; OR
If a dividend is declared then the shareholders will pay income tax under ITTOA 2005 Pt 4 on the dividend
(less any credit)
Financial Assistance
• s.151 CA85 – prevents company giving financial assistance in acquiring shares in the company
o Business (Assets to constitute going concern)
If using part loan to acquire, buyer can offer assets of company as security
o Shares
Cannot offer assets as security as this would be granting indirect assistance to buyer
Ease of integration
• Dependent on the facts
Hive-down: A compromise
1. Target company sells some/all of its assets to new company (“Newco”)set up as wholly owned subsidiary of target company
2. Buyer acquires all shares of Newco
3. Target sells all shares in Newco to buyer
STRUCTURE OF THE TRANSACTION
Pre-contract
Heads of agreement/Letter of intent
• Key issues that have been agreed on following negotiation
• Provides focus for process of transaction
• Presumption of intent to create legal relations as are 2 commercial parties BUT unlikely to be binding:
o Paragraph at end of heads stating “these heads of terms are not intended to create legal relations except in the case of
provisions 1, 2, 3….”
o Marked as ‘subject to contract’
Heads normally marked ‘subject to contract’
Heads normally precede detailed investigation into the target company
Some heads will be binding and this must be expressly stated to be the case
o Exclusivity
Of negotiation and right to buy company for specific period for named buyer
Enforceable provided is sufficiently certain (Walford v Miles [1992])
• Doubt cast by Court of Appeal which said lock-out agreement is no more than agreement to negotiate
CAN make a lock-out = seller will not talk to anyone else except buyer for specified period
• Must specify time limit
CANNOT make a lock-in = seller will only talk to the buyer
**THINGS TO CHECK IN THE EXAMS Re: Heads of Terms ***
1. Parties
a. Is/Are letter/heads addressed to correct party i.e. the seller, not the company they are selling?
i. If a share sale:
1. Should be addressed to Shareholders
2. Should identify all shareholders as party to the contract
ii. If business sale
1. Should be addressed to the Company
b.
2. Consideration
a. Is it the correct value?
b. Is it the correct form?
c. If no value or form of consideration given in facts – suggest checking with client as to amount and type to be paid
3. Has it been marked subject to contract somewhere?
a. Or expressed to “not be legally binding”
4. Have parts that are intended to be legally binding been expressly stated as such:
a. Confidentiality
i. Include exceptions such as info in public domain, Information provided by either party to its professional
advisors in connection with the sale and purchase, information required to be disclosed to third party
authorities by law/regulation
b. Fees
i. Who should be responsible if acquisition doesn’t complete?
1. Each party for own costs?
5. Have all key terms been included
a. Provision for conditional on approval of change of control/assignment – NB – if acting for seller then don’t worry
about this as not in client’s interest
6. Must be a provision for disclosure to cover the warranties made
7. Should not be provision for “full due diligence”
a. Delete “full” and use only due diligence since full would allow buyer carte blanche access to the business,
employees etc which is very onerous for seller
8. Make sure all terms are clear, certain and/or defined
a. “Senior managers” – who are these i.e. have they been identified in the facts already?
9. Are there any provisions which were not agreed or intended?
a. Non compete clause which was not discussed/intended/relevant
10. Are any clauses void for lack of certainty or simply void?
a. Cannot have lock-in clause; only lock-out allowed
11. Are all clauses reasonable?
a. Where either party liable for fees/costs as a result of their breach, should be expressed to be all “reasonable
costs/fees not exceeding X”
12. Are clauses reciprocal?
a. Where seller will be liable in fees to buyer for a breach, make sure buyer has similar obligation should they breach
13. Include a confidentiality clause
14. Ensure Heads are not legally binding:
a. “There is not intention by either party to create legal relations except in relation to provisions 1,2,3, etc”
15.
Due Diligence
• Buyer should acquire as much info about target company as possible
o Value
o Liabilities
o assets
• Solicitor should cooperate by answering all questions fully and quickly as time will be a factor
Confidentiality agreement
• Either stand-alone or as part of Heads of Terms
• Seller may be unwilling to pass certain sensitive info before unconditional exchange of contracts
o Will depend on facts
• Both buyer and/or seller may wish to keep entire deal and discussions secret to last minute
• Where seller prepared to pass some info, should make buyer enter into confidentiality agreement containing some or all of
following:
o Definition of confidential information (excluding info in public domain or already known to proposed buyer)
o Obligation on buyer not, without seller consent, to disclose or use such information except for authorised purposes (as
defined)
List of authorised persons to receive such info
May prevent buyer from soliciting customers, suppliers or employees of target for specified period
• Must be careful that doesn’t amount to restraint of trade
o Undertaking from buyer to destroy such info if acquisition doesn’t proceed
o Agreement that neither party, without consent from other, will make announcement that negotiations are taking place
• May be in formal agreement or in letter to seller
Contract
Acquisition agreement (‘Sale and Purchase’/’S&P’)
• Parties agree to transfer title to shares or assets
• Complexity comes from protections sought by buyer in form of warranties and indemnities from seller
• Buyer’s solicitor drafts first copy then seller’s makes amendments
• Usually simultaneous with completion stage
o If not (waiting for consents, licenses to assign etc) then will be a conditional contract
Disclosure letter
• ALWAYS have one – these go hand in hand with warranties
• Prepared by seller’s solicitor
• Linked to acquisition agreement
• Disclosure of info which, to withhold, would put seller in breach of warranties (being given in agreement)
o WHAT: Seller attaches relevant docs etc – ‘the disclosure bundle’
o WHY: Done to prevent buyer bringing breach of warranty claim
May negotiate lower price/ask for indemnities
• If actually written by solicitor should include disclaimer that all info provided by client and solicitor accepts no responsibility for
content
• Should also send draft copy to opponent solicitor first
• Hand over at same time as acquisition agreement
7. Seller’s and buyer’s solicitors agree final versions of both Disclosure letter and Acquisition agreement
Pre-completion – don’t always have this stage since contract and completion are usually simultaneous
• Ideally completion will take place immediately after acquisition agreement signed but often is a gap
o Where parties enter into agreement conditional on the happening of a certain event
• During this period parties will ensure conditions are met and maybe repeat searches made in due diligence process
Completion
• Share sale
o Seller’s solicitor hands over signed share transfer forms
o Completion board meeting of target company to deal with:
Resignations of directors
Appointment of directors
Approval of share transfers
Board meeting minutes (referred to in acquisition meeting as ‘in the agreed form’ and annexed to the
agreement)
o Method of completion normally included as clause in acquisition agreement
• Business sale
o Title formally transferred in return for purchase price
o Any land must be transferred by deed (assignment, transfer or conveyance as appropriate)
o Machinery etc transferred on delivery
o Goodwill and benefit of contracts may also need assigning
o No formal documentation needed to pass machinery etc since transfer is on delivery
Post-completion
• Share sale
o Ensure:
stock transfer forms stamped
internal registers updated to reflect, for example, change in members and directors
appropriate info filed at CH
• Business
o Where involves transfer of land will ensure appropriate registrations made at HMLR or Land Charges Department
• Both
o Integration of the business/assets into the buyer’s own
Not necessary if
can exchange and
complete
simultaneously,
though if this is
the case, repeat
searches should
be carried out
prior to stage 2
Compliance with the FSMA 2000
Regulated activities
• If involved, must obtain authorisation from FSA
• Activities involving defined financial matters as standalone service
• Advising and arranging share purchase is regulated activity – s.22 FSMA 2000
• Takeover Exclusion:
o where will result in buyer owning 50% or more of company’s voting shares; OR
o buyer obtains day to day control of the company’s affairs
• Most solicitors firms fall within the exception since they are unlikely to be offering standalone financial advice
***ESSENTIALLY***:
BUT
Limitations
• Doesn’t eliminate threat of release/misuse of confidential information
a. helps but doesn’t guarantee
Remedies
• Injunction stopping buyer doing what it wants
a. need to monitor how info being used
b. difficult to know of breach until it happens and then it is too late (once in public domain there is nothing that can be
done)
• Damages
a. difficult as need to prove:
1. breach
2. loss resulting from that breach
DUE DILIGENCE (CORE)
Purpose
1. Investigation of target
a. composition
b. operations
c. value
d. contracts etc
2. check company is actually worth what it is valued at
a. may ask for reductions in price as result of the DD process
b. may need indemnities and warranties as to values of assets etc
3. can target be integrated with buyer’s existing operations?
Size of company
• smaller then likely to be fewer docs to conduct DD on
Time constraints
• Commercial transactions often kept to overly tight time limits which will constrain
Confidentiality
• Seller may wish to keep sale secret even from its workforce which will limit scope of DD
o All comms through one person
o Code-name for communications
o Reasons for visits to premises not disclosed
• Seller may be reluctant to pass on customer lists
o Confidentiality agreement can remedy this
Environmental matters
The environmental problem in acquisitions
• Buyer will not know nature and extent of environmental liabilities
o More problematic for share acquisition where taking on all past liabilities (subject to indemnities)
The legislation
• Environmental Protection Act 1990 (EPA 1990) as amended by Environment Act 1995
Licensing
• EPA 1990 introduced Integrated Pollution Control to regulate discharges from processes involving fuel, power, metals, minerals,
waste and chemicals into the environment
• License is required for business to conduct a prescribed process
o Prescribed Processes
• Part A
• Full IPC license required (covers all discharges from process into environmental medium)
• Part B
• License covering air emissions only is required (LAAPC license)
• May need further authorisation, depending on circumstances
• Licenses often have conditions attached, e.g:
o BATNEEC – Best Available Techniques Not Entailing Excessive Cost are used to minimise harm to environment –
EPA 1990 s.7
• Part II EPA 1990 – system for regulating waste management
o License required again (covers deposit of controlled waste on land and treatment, keeping or disposal of controlled
waste)
Consents
• Water Resources Act 1991 – license required if process involves discharge of polluting water into water courses
• Water Industry Act 1991 – consent needed before trade effluents discharged into public sewers
Continuing liability
• Seller will remain liable until the Environment Authority accepts the surrender of the licence
o it won’t do this until it is satisfied that the condition of the land and operation of the site is satisfactory
• licences are transferable but only if the EA deems the transferee fit and proper
Taxation
• Current tax position of target including:
o Current tax liabilities
o Adequacy of provisions for tax in accounts of target
o VAT and PAYE compliance
o Whether affairs up to date
• Effect acquisition will have on tax affairs of target and buyer (will transaction create any charges to tax)
• Likely future tax position of target
• Warranties and indemnities that should be obtained
Profitability
• Aim: get breakdown of :
o Turnover
o Overheads
o Profit
o Trends
• Look at previous 3 or 4 accounting periods; AND
• Any unaudited information that may be available
Premises
• What
• Where
• Tenure
The replies
• Provided there is confidentiality agreement, management should give full and frank replies
• Buyer’s solicitor and team should check replies and follow up with any further queries
• Answers will have impact on warranties and indemnities
Loans
• Business Acquisition:
o Any assets subject to charge?
Either:
• Remove on completion; OR
• Consent of chargee for asset to be transferred subject to charge
• Share acquisition
o Request copies of all loan docs
Any loans repayable on demand?
Any loans immediately repayable on change of control?
Must be confident of securing funds elsewhere if need be
o Has seller guaranteed any obligations of the target?
Buyer will likely have to given indemnity to seller and/or pledge to owner of guarantee
o Where target is part of group:
Buyer should insist any guarantees made in respect of other members of the group do not continue until
after completion
Intellectual property
• What rights are being acquired?
• Are they adequately protected?
• Will change of control affect protections?
• Details of computer systems and software used by target
• Business Acquisition:
o Buyer may need to renegotiate licenses
• Possibly instruct patent agent to conduct patent search and enquire at UK IP Office that target’s patents are valid and not
infringing any other patents
Accounts
• Request audited accounts for previous 3 years
• Any recently produced management accounts
• Then consider whether any warranties or indemnities are required
Other information
• Employees
• Pensions schemes
• Environmental matters
• Property
• Taxation
• Constitutional matters
Searching the file at the Companies registry
The search
• Quick and inexpensive way to obtain similar info on company
• Repeat shortly before entering into main agreement/completion
• Search against name of seller company (even if buying one of their subsidiaries)
• Limitations:
o Information cannot be wholly relied upon
o Burden on target to file such info and is liable to fines on default; BUT
No provision for compensating a 3rd party who suffers loss as result of inaccurate information
Contents of file
Memo and articles
• Check that there is a power for company to dispose of business and that directors have that power
• Check what steps will be taken on completion e.g. in relation to completion BM
• Any restrictions on transfer of shares?
o Not allowed for admission to listing
Charges
• Business acquisition:
o Any charges over assets being transferred?
Buyer will insist on release upon completion
• Share acquisition
o How far has target charged assets as security for loans?
o Care must be taken since may have recently created a charge and not yet registered it so it won’t show up, yet will
still be valid against a purchaser
Accounts
• Limited value
o may not include last set of audited accounts which need not be filed for 10months after ARP
o May be in abbreviated form if SME
• Will want to see any recent management accounts
Insolvency procedures
• May reveal that target is in liquidation, receivership or administration
Internal registers
• Statutory books and others
• Register of members
• Minute book
• Allotments and transfers of shares carried out in accordance with statute (ss.80 and 89 CA85) and articles of company
Credit Reports
• Another way of obtaining reliable financial information re:
o Average debt collection
o Payment periods
o Company’s liquidity
Property matters
Scope of investigation
• Not always possible to carry out full investigation (structural survey, title etc) since may alert employees etc
• Risk to buyer depends on importance of properties
• Other than full investigation, buyer could obtain protection by:
o Certificate of title given by seller’s solicitor; AND/OR
o Property warranties given by seller in acquisition agreement
Certificate of title
• Seller’s solicitor will have to carry out investigation of title before giving certificate
• Chief certification sought:
o Property has good and marketable title
• Schedule to Certificate will give:
o Description including title number and class of title and summary terms of any leases
o Statement that not subject to any specified encumbrances except as set out in certificate
• Precise format and wording up for negotiation
• Buyer will want to know on what information the certificate is based
• Buyer can sue seller’s solicitor if negligently prepared
o Unless mistake as result of info provided by client and where certificate makes it clear that all statements based on
info provided by client
Form of investigation
Inspection/valuation/survey
• Physical inspection particularly important
o Have repairing obligations been complied with?
• Valuation will allow buyer to compare with values given in the accounts of the target
• Full structural survey ideal but often not feasible
Landlord’s consents
• Business acquisition
o Consent to assign leasehold premises likely needed
• Share acquisition
o Consent may also be needed if assignment is defined in the lease as change in control of the tenant company
• Has seller guaranteed lease obligations?
o Seller will likely ask for undertaking from buyer to use best endeavours to obtain release for seller from obligations
and an indemnity to them until such time as this is achieved
Excluded tenancies
1. Tenancies at will
2. Fixed term tenancies not exceeding 6 months
a. Usually cannot grant succession of 6 month contracts to circumvent the contract
i. Two back-to-back 6 months terms is OK, but cannot include option to renew in either
b. Unless provision for renewing included
c. Will not be excluded if T already in occupation for 12months or more when lease comes to be granted
3. Contracted-out tenancies
a. Must be for fixed term
b. s.38(4) – allows parties to agree for security of tenure NOT TO APPLY to any given tenancy
i. not applicable to periodic tenancy
c. For leases granted prior to 1 June 2004, court approval needed
d. For leases granted after 1 June 2004, notice procedure applies: - LTA 1954 s.38(4) and the transitional provisions
found in s.29(3) Regulatory Reform (Business Tenancies) (England and Wales) Order 2003
i. Complete either before lease granted or before T becomes contractually bound to take lease
ii. LL must give T notice in prescribed form which warns that they are agreeing to lease without security of
tenure and advising to obtain professional advice
iii. T makes declaration that has received notice
1. If T given notice by LL less than 14 days before grant of ease/contractually bound then must make
statutory declaration before independent solicitor
iv. Reference to service of notice and Ts declaration must be contained/endorsed on doc creating the lease
Who should the sub-T serve notice on? - the competent landlord
• Lease granted out of freehold
o Competent LL = Freeholder
• Sub-lease to T2
o Ts lease does not have security of tenure i.e. LTA 1954 doesn’t apply
If T1 lease has more than 14 months left to run
• Competent LL = T1
If T1 lease has less than 14 months left to run
• Competent LL = Freeholder
LL’s grounds for opposition under Section 30 – must oppose before date of termination
1. Discretionary grounds – LL must show T ought not to be granted new tenancy in view of facts giving rise to grounds:
a. Ground A – Tenant’s failure to repair
i. Must be serious and T must not have repaired before the court order was made
b. Ground B – persistent delay in paying rent
c. Ground C – Substantial breaches of other obligations
d. Ground E – sub-letting of part where higher rent can be obtained by renting the whole
i. ***Compensation may be paid if used***
2. Mandatory grounds
a. Ground D – alternative accommodation
i. Must be suitable to Ts needs and on reasonable terms
b. Ground F – LL intends to demolish or reconstruct and could not reasonably do so without obtaining possession
i. LL must show that on termination of tenancy:
1. Fixed and settled intention to carry out relevant work (on date of court hearing)
2. Intends to demolish/reconstruct premises (or substantial part) or to carry out substantial works on the
holding or a part of it
3. Cannot reasonably carry out work without obtaining possession
a. T could prevent LL proving this by agreeing terms on which LL could have access
4. ***Compensation may be paid if used***
c. Ground G – LLs intention to occupy the holding for his own business or residence
i. Won’t be able to rely on if re-letting premises
ii. Cannot rely on if his interest was purchased/created within 5 years before the ending of the current tenancy
1. ***Compensation may be paid if used***
Amount
• Equivalent to rateable value of the holding; UNLESS
• T and predecessors have been in occupation for at least 14 years, when it will be twice rateable value
Contracting out
• Any agreement restricting/excluding payment of compensation void if T or predecessors in same business have been in
occupation for 5 years or more
• THEREFORE – contracting out possible where T in occupation for less than 5 years
Interim rent
• Where T applied for new tenancy, current will not end on expiry of s.25 or s.26
o Will continue until 3 months after conclusion of proceedings
LL or T can apply for interim rent to apply pending outcome of proceedings
• Normally rent payable under new lease; UNLESS
Interim rent set at market o LL opposing grant of new tenancy; OR
rent for a yearly tenancy of o Terms of new lease substantially different; OR
premises ‘having regard’ to o Rental values have changed significantly in period before grant of new lease
the rent under the old lease –
normally results in lower rent
being assessed which is why
LLs have penultimate day
rent reviews
PURCHASE PRICE AND COMPLETION ACCOUNTS
Purchase price
Form
Cash
• Most common
• Buyer must ensure financial arrangements are in place before entering into a commitment to acquire target
Shares
• Buyer issues shares in itself in exchange for the shares of the target
• Shares will need to be readily marketable (private company shares unlikely then)
• Buyer may prefer this to limit its borrowing requirements
• Seller may prefer this so as to roll over the capital gains on sale until disposal of new shares
• Should state how the shares rank and what rights are attached i.e. dividends
• Buyer may also include clause restricting how many of the new shares the seller can dispose of in any given time period after
completion
• Where seller wants cash but buyer wants to issue shares, use ‘vendor placing
o Buyer arranges for shares to be sold on immediately following completion to institutional investors
o Buyer undertakes that the sale will yield a specified sum
Loan notes
• IOU
• Buyer pays at intervals
• Clause allowing seller to demand some or all of price stated after specified period e.g. 12 months
When is the purchase price paid?
Completion accounts
• 1 amount paid on completion, another amount (paid or refunded) following completion accounts
• Common for agreed price to be adjusted after completion of accounts following completion
• Initial valuation may have been against most recent accounts but buyer may want this confirmed
• Agreement may provide for maximum amount of consideration to be paid on completion subject to a repayment if necessary after
completion of accounts following completion
• Typical clause:
o Completion accounts to be drawn up within specified period after completion e.g. 1 month (seller’s accountant usually
responsible)
o Buyer (or seller if buyer’s accountant prepared accounts) have right to dispute account within specified period
o In absence of agreement, matter to be referred to independent firm of accountants
Earn outs
• Portion of price left unpaid at completion
• Balance is determined by reference to performance of target company for specified period after completion e.g. 3 accounting
periods
• Appropriate where sellers continue to manage the company after completion
• Clause should provide for:
o Who will prepare accounts
o What basis they will be calculated e.g. net profit, earnings etc
o Mechanism for resolving disputes i.e. refer to independent accountants
• May agree that deferred consideration to be in form of shares
• Buyer may also retain right to deduct any warranty claim that may arise from the deferred consideration
• Pros
o Buyer
• Maintains decent cash flow since doesn’t need to pay all in one go
• Avoids buyer paying over the odds
• Acts as motivating factor for selling managers following sale since they will receive more for the balance if the
company performs well
• Provides more accurate valuation
• Previous years’ accounts may have been made at time of abnormal success
• Spread the risk of potential loss in profits
o Seller
• Allows to maintain continual involvement in the development of the business
• May be able to get more money if beats targets set
• Advantage of buyer’s experience/synergies may improve profitability
• Cons
o Sellers who continue to manage and buyers may pull in different directions following completion
• Sellers will want to ensure high profit margin
• Buyer will want to ensure decisions made which guarantee long term profitability for the target, at expense of
short term profits
• May get around this by setting objectives for the earn out period and obligations/restrictions i.e. buyer not to sell
whole or part of business nor to permit any non-arms length trading between target and buyer
Restrictive covenants
• Share acquisition agreement will often restrict sellers from:
o competing with target company
o soliciting customers, suppliers and employees
o using or disclosing confidential information
Payment by instalments
• Where over period of 18months or more
• Tax may be paid by instalments at option of taxpayer
• Must agree instalment schedule with HMRC
Purpose
• Completion accounts intended to lead to a price adjustment
o Audited accounts will be out of date
o Management accounts are less reliable
• Allows transaction to proceed where uncertainty as to price/warranties given
o Buyer can retain some of the consideration for security; OR
o Seller can hold all consideration then make refund
• Types of price variation:
o Net asset mechanism – price increased or decreased on completion depending on whether net assets on completion are
higher or lower than pre-determined target
o Cash free, debt free, normal to actual working capital mechanism -
• Types of completion account:
o Full profit and loss account and balance sheet
o Balance sheet
o Net assets statement
o Valuation of a specific asset or assets, such as cash or working capital
Locked box mechanisms (share transactions, not good for asset transactions)
• Fixed price determined in advance with reference to accounts up to an agreed date
• Advantage for seller as, because there are no completion accounts, it has certainty of proceeds
• Possible disadvantage for buyer as no opportunity to vary
o Must be familiar and satisfied with the agreed accounts
o Usually clause requiring agreed account to be prepared with ‘reasonable care’ and using figures extracted from last
audited accounts
• Often an interest mechanism applied to price from date of agreed accounts to completion
o Alternative is to use ‘daily earnings amount’ reflecting earnings of target for same period
• Buyer will also require protection from ‘leakage’ being accrued by seller in form of:
o Dividends
o Other distributions or returns of capital not being on arm’s length in ordinary course of business
o Fees/expenses in connection with transaction and other costs inappropriately put through target
o Payments made/assets transferred to/liabilities assumed, indemnified or incurred for benefit of any target shareholders or
connected persons, other than agreed as ‘permitted leakage’
• Seller will provide undertaking that any leakage other than permitted leakage be repaid to buyer on £for£ basis
• Basic point is that SPA should be clear, unambiguous and consistent about what policies are to be used
Debtors
• Value of bad and doubtful debt needs to be ascertained
• Define when a debt will become bad
Other difficulties
• How long should be allowed from completion to prepare the completion accounts?
• Usually include clause defining ‘hindsight period’ (point up to which preparer of accounts delivers first draft of
accounts to reviewer
Reducing the scope for dispute
Stock
• Usually valued at ‘lower of cost and net realisable value’
o What proportion of production overheads should be included in cost?
Depreciation
• Define from when and for how long a period the fixed asset will be depreciated
• Avoid the phrase “over the expected useful life”
Debtors
• How to define/account for bad debt:
o 25% deduction of specific debt where over 3 months old
o 50% deduction where over 6 months old
o 100% where debtor in receivership or where account is in hands of solicitors
Timing
• SPA should include clause agreeing time for preparation of completion accounts and subsequent review(X business days)
o Date when preparer will deliver first draft
• Possible sanctions if either party fails to meet deadlines for preparing/reviewing
o Use an escrow account
Both parties contribute to the account and funds will only be released on successful completion of certain thing
i.e. preparation and delivery/review
o Apply reasonable rate of interest from completion date to any purchase price adjustments
Rejection of statement
• If reviewer doesn’t agree, SPA should allow for reasonable period for discussion
• If no agreement in this period, dispute resolution mechanism should be triggered
Access
• SPA should provide for each party to allow the other access to relevant books, records and information
• May also include right for non-preparing party to monitor the preparation process closely
o Stock take monitoring, for example
Disputes
• SPA should provide for them to be referred to:
o Independent accountant(s) to be agreed by parties; OR
o If cannot agree within specified time, accountant to be nominated by president of the ICA
• Other issues:
o Assistance – contractual obligation on both parties to give access/assistance to the nominated accountant
o Submissions to independent accountant – whether they should be allowed, whether the accountant would need to invite
such submissions
o Expert not arbitrator – state that accountant is “acting as expert not arbitrator” and that decision will be final and
binding. Enables parties to avoid Arbitration Acts and to prevent any right of appeal
o Cost – specify how costs to be split, or allow for accountant to determine balance of costs
Sometimes will stipulate that party referring dispute to accountant should bear cost, unless accountant finds in
their favour and the adjustment is greater than a specified amount i.e. 10%
o Any certificate or determination – given by accountant must be certain (Shorrock Ltd v Meggitt plc)
o Interest payments
If escrow account not used
Seller may require buyer to make notional interest on any additional consideration from date of completion to
date of payment
Buyer may require similar from seller if refund of some consideration is required
o Guarantees
If a large extra consideration is anticipated
Tax considerations
Shares, land and buildings
Stamp duty
• Shares – 0.5% to nearest £5
• Interest payable on unpaid duty after 30 days from execution of documents
SDLT
• Payable automatically 30 days after completion
• <£125,000 (<£150,000 for commercial property) – No Tax Payable
• >£125,000 <£250,000 – 1% of purchase price
• >£250,000 <£500,000 – 3% of purchase price
• >£500,000 – 4% of purchase price
Advantages
1. Appropriate for valuation purposes
a. can be adapted for specific aims of the buyer/seller
2. Up to date information
a. rather than relying on older audited accounts
3. Time saving
a. By deferring detailed valuation until after completion, negotiation period can be reduced
b. So long as basis and scope of completion accounts can be agreed during negotiation
Disadvantages
1. Potential for dispute
a. Over scope and basis of completion account preparation
b. Less likely to compromise as they would have done in pre-contract negotiations since less incentive for them to do so
2. Delay in ascertaining price
a. Depending on complexity of completion account preparation, could be long delay in determining price and negotiating
what the accounts will cover
3. Difficult to isolate specific elements
a. What is and is not to be included in the accounts may be difficult to define
b. Seller may wish to include unanticipated benefits to buyer whilst buyer will not
4. Cost
a. Of preparing the accounts in the first place
b. If independent firm of accountants has to be used because if disagreement, costs will rise
APPORTIONING RISK AND LIABILITY incl warranty claims
and
LIMITING LIABILITY
General points
• Buyer drafts SPA so all warranties/representations/indemnities heavily in their favour
• SPA will be heavily negotiated so no right or wrong answer
• Bargaining power of parties will play large role in determining the content
Warranties (contractual)
• Free to agree any amount payable for damage so long as genuine pre-estimate of loss that would be suffered (‘liquidated
damages’) and not a punitive amount designed to threaten (‘penalty’)
Representations (tortious)
• Rescission
o Often not possible on a share sale
What buyer and seller will want, generally
1. Buyer will want all warranties to also be representations because this gives the widest protection (tort and contract)
2. Seller will only want the warranties to be included as part of the SPA (entire agreement clause)
X buys Y for £5m and Y is in fact worth £5m but a breach of warranty results in a £500,000 reduction in value
No difference
1. Contract Claim:
a. Market Value where no breach of warranty = £5m
LESS
b. Market Value as it actually is with the breach = £4.5m
THEREFORE
c. Buyer receives £500,000 damages
2. Tort Claim:
a. Price Paid = £5m
LESS
b. Market Value as it actually is with the breach = £4.5m
THEREFORE
c. Buyer receives £500,000 damages
X buys Y for £4m and Y is in fact worth £5m but a breach of warranty results in £500,000 reduction in value
Contract (warranty) claim more favourable
1. Contract Claim:
a. Market value where no breach of warranty = £5m
LESS
b. Market value as it actually is with the breach = £4.5m
THEREFORE
c. Buyer receives £500,000 damages
2. Tort Claim:
a. Price paid = £4m
LESS
b. Market Value as it actually is with breach = £4.5m
THEREFORE
c. Buyer receives nothing as has suffered no loss
X buys Y for £6m and Y is in fact worth £5m but a breach of warranty results in £500,000 reduction in value
Tort (warranties as representations) claim is more favourable
1. Contract Claim:
a. Market value where no breach of warranty = £5m
LESS
b. Market value as it actually is with breach = £4.5m
THEREFORE
c. Buyer receives £500,000 damages
2. Tort Claim:
a. Price Paid = £6m
LESS
b. Market Value as it actually is with breach = £4.5m
THEREFORE
c. Buyer receives £1.5m
Indemnities
Assignment of warranties/indemnities
• May be necessary where buyer wishes to sell business soon after acquiring
• Possible only with express provision
o Contracts (Rights of Third Parties) Act 1999 also allows benefits of warranties/indemnities to be assigned and to
confer power to enforce on third parties
• Seller likely to oppose provision on grounds that buyer could potentially assign to anyone
o Will be negotiated – maybe right to assign conditional on initial seller’s approval
Guarantees
• If seller part of a group, security may come from parent/holding company
• If seller individual, buyer may demand charge over assets
General Limitations
• Minimum limits
o Usually about 1% of the consideration
May also wish to insist on a de minimis threshold for each individual claim e.g. £5,000
• Further limit that will not respond to any claims until aggregate value of all claims exceeding £5000
totals £20,000
o Buyer should insist that once threshold is breached it is allowed to recover the full amount and not just the amount
exceeding the threshold
• Time limits
o Normal contract – 6 years from date of contract
o Deed – 12 years from contract (or 12 years from tax matter covered where separate deed of tax indemnity)
o Normal for seller to agree to shorter period of potential liability for tax matters e.g. 7 years
HMRC’s time limit for them to make a claim against a company is 6 years
o Even shorter for non-tax matters and often linked to target company’s audit
Usually allows for 2 full audits to be carried out before potential liability expires
o Sometimes clause allowing buyer to bring claims outside this period where is provides sufficient detail to the seller
Should still insist on a long stop for this to avoid liability continuing indefinitely
• Insurance cover
o Seller will insist that claims cannot extend to something covered by insurance
Arguments over what can reasonably be expected to be covered by insurance
• Conduct of claims
o Where third party takes action because of a breach of warranty made by seller – who should handle case?
o Seller will say they should since buyer may handle less vigorously and thus seller will be forced to pay out
o Buyer will say that if seller loses then damage to reputation of the target and thus, the buyer’s acquisition, will be harmed
o Whoever is agreed to have control, the other will be allowed to have some influence e.g. require consent to settle out of
court
Disclosures
Nature and purpose of the disclosure letter
• Helps seller avoid breach of warranties in relation to matters disclosed
• Buyer will take a view of the seriousness and impact on acquisition of any disclosures made
o May prompt withdrawal from acquisition/re-negotiation of price/indemnity
Full disclosure
• Acquisition agreement will provide that warranties are given subject to matters disclosed in the disclosure letter
• Seller will want to make all disclosures as specific as possible as buyer must be given specific notice of all disclosures for them to
be valid – Levison v Farin
• Buyer will usually insist copies of docs relating to all matters disclosed be attached to the disclosure letter so they may be
examined
o Buyer will also insist on disclosure being limited to matters in the letter and bundle
• Clause stating that warranties are only qualified by matters contained in the letter and not by the buyer’s own knowledge
o Dodgy ground – buyer may not be able to rely on this but not certain – Eurocopy plc v Teesdale
o Where general disclosure (rather than specific) is used, buyer’s own knowledge will be relevant –
Infiniteland Ltd v Artisan Contracting Ltd
Deemed disclosures
• Letter will refer to these, publicly available pieces of information, that buyer expected to find itself:
Information on target’s file at Companies Registry
Matters apparent from deeds of properties owned that would be available on conducting relevant searches at land
Registry and Land Charges Department
Maters that would be apparent on inspection of the property
• Buyer should only accept where full survey has been commissioned
Matters within the public domain
• Buyer should seek to restrict this to those matters in public domain it could reasonably be expected to be aware
of
Matters disclosed or referred to in audited accounts (e.g. for last 3 years)
Matters included or referred to in the accountants’ report prepared on behalf of the buyer
• Negotiation over this because often purpose of report varies so buyer may not wish to have to rely on it
Check the SPA as to what constitutes a breach (or state that you would need to check it)
4. Buyer’s knowledge
a. Effect will depend on court:
i. What do terms say
1. Is it a Eurocopy (buyer friendly) or Infiniteland (seller friendly) exclusion clause as to buyer’s
knowledge?
a. See disclosure section – next section
DISCLOSURE
Purpose
1. For the buyer to elicit information
2. For the seller to qualify warranties and prevent the likelihood of claims being made by the buyer
Effect
Buyer will take view of the disclosures given in terms of seriousness and impact and this may trigger:
• Withdrawal from acquisition
• Re-negotiation of price
• Indemnities
Reasoning
• Seller wants to make as many disclosures as possible to limit possibility of any claims against it
1. will want to give general disclosure (to cover mattes it isn’t expressly aware of)
2. will want to give specific disclosures of breaches it is aware of
• Buyer wants to be able to make as many warranty claims as possible
1. wants disclosures to be as specific as possible
2. will want to avoid general disclosures as these will limit its ability to bring claims
Standards of Disclosure
High Standard/Buyer Friendly (Levison and others v Farin and others style)
Save as disclosed in the disclosure letter with enough detail to identify the nature, extent and scope of any losses/continuing losses
Keys
1. Save is disclosed in disclosure letter – limits what can be taken account of i.e. if not in the letter then buyer can make a claim
2. With enough detail to identify the nature, extent and scope… - any disclosure in the letter must be specific enough to allow the
buyer to have made conclusions from it as to current and future potential losses etc
Keys
1. Save as disclosed – allows seller to rely on all info passed to buyer including the disclosure letter, discussions, bundles of
documents…
Balanced
The sellers jointly and severally warrant to the buyer that the contents of the Disclosure letter, and all accompanying documents, are
true and accurate in all material respects and fairly disclose every matter to which they relate
Buyer’s Knowledge
Buyer friendly (Eurocopy plc v Teesdale and others style)
Save as disclosed in the disclosure letter, there are no other facts or matters which will prejudice any claim made by the buyer in
respect of the warranties
Keys
1. The knowledge of the buyer will not be taken into account in limiting when they can claim i.e. even if they have actual,
constructive or imputed knowledge of a breach of a warranty, they can enter into the agreement and still make a claim against the
seller
2. the disclosure is limited to that given in the disclosure letter
Seller Friendly (Infiniteland Ltd and another v Artisan Contracting Ltd and another style)
Save as disclosed and subject to the actual, constructive and imputed knowledge of the buyer, howsoever obtained (save where
obtained fraudulently) there are no other facts or matters which will prejudice any claim made by the buyer in respect of the warranties
Keys
1. The actual, constructive and imputed knowledge of the buyer will be taken into account when assessing whether it can make a
claim for breach of a warranty i.e. if, regardless of disclosure that is given, the buyer knows of a breach of warranty either on its
own (actual), through an agent (imputed) or it ought to have known (constructive) then this will prevent it bringing a claim
2. Disclosure is not limited to the letter and can take account of bundles, discussions etc etc
Balanced
The rights of the buyer in respect of the warranties shall not be prejudiced by investigation of the company, save to the extent that
such investigation gives the buyer actual knowledge of the relevant facts or circumstances.
Shares
Buyer Shareholders
consideration
Ownership
Company
Running
Buyer Company
Cash
Running
Business
General
• Target may not have own legal identity so will need to decide between parties which assets constitute the business
• Intangibles are sometimes more difficult to identify e.g. contracts, debtors and creditors
• ***IF YOU AGREE TO TAKE A BENEFIT YOU MUST ALSO CONSIDER WHAT HAPPENS TO THE BURDEN i.e. NEED TO
GIVE UNDERTAKINGS AND INDEMNITIES ETC***
Contracts
How to transfer
1. Novation (rarely used)
a. negotiate with the 3rd party to release the seller from their obligations under the contract and for buyer to assume burden
and benefit
What does the buyer receive when taking the book debt?
• The right to receive payment from the 3rd parties
What must the buyer ensure?
• That the book debt is legally transferred (s.136 LPA 1925 notice and in writing) so that the buyer can take action directly against
the debtor
Because this will give the buyer a remedy for breach of warranty if the warranties turn out to be untrue
• Guarantees
o LL will demand equivalent guarantees from the buyer of the lease as it has from the current seller
o Lease may stipulate that LL not obliged to consent unless such guarantees are obtained
• Conditional Contract
o If licence to assign not ready in time, parties may make acquisition agreement conditional on the consent of the LL and
incorporate right for either party to rescind within specified time limit should such consent not be given
• Costs of licence
o Current tenant will have to pay
o Rare for this cost to be passed to buyer
Risk
• Buyer will assume on exchange of the SPA (or on date of condition being completed i.e. licence to assign) and should have
insurance on the plant/machinery from this date
Warranties
Buyer will want following from seller:
Intellectual property
Schedule
• Should contain list of trade marks, service marks, registered designs, copyrights and patents included in transfer
Warranties
Buyer will want from seller:
1. seller is beneficial owner or registered proprietor of the Intellectual Property Rights (as defined in the interpretation clause)
2. to best of seller’s knowledge and belief those rights are valid and enforceable
3. seller has not granted any person a right to do anything which would otherwise be an infringement of those rights
4. no licences for the use of intellectual property have been granted to the seller or are required to run the business
5. operation of the business does not infringe the intellectual property rights of any other person
6. seller has not disclosed trade secrets, know-how or confidential information except in normal course of business
Warranties
Buyer may seek warranties that stock:
• of satisfactory quality
• not obsolete or unmarketable
Completion
Transferring title
1. Conveyances, transfers or assignments of land and premises
2. Assignments of goodwill, certain intellectual property rights and the benefit of contracts
3. Stock etc is transferred on delivery
• A small company selling its business may push it into the higher Corporation Tax band, though can claim exemption if it
reinvests into replacement business assets
• Right to carry forward trading losses is lost when business is sold
Business Sale
Share sale
Liquidating the company
• Shareholders may extract money by putting company into voluntary liquidation
• Shareholders will be treated as disposing of their shares and:
o individual shareholders will be liable to CGT
o corporate shareholders will be liable to Corporation Tax
• Potential double charge where sale of business:
o 1 charge to Corporation Tax on disposal of the business
o 1 charge to CGT on winding up
Distribution by dividend
• Company may declare one before putting into liquidation
• Double charge for individual shareholders again
Implications for the buyer of a business
Capital Allowances
• Not restricted to purchase of new assets
• Buyer will be able to claim allowances for the assets he obtains from the seller
• Price will be what buyer paid for them, not what their WDV is
o The seller will be subject to a balancing charge, however, if it sells the asset for more than its WDV
Trading stock
Amount paid by buyer will be deductible expense when working out income profits
Roll-over relief from CGT (or corporation tax) on replacement of qualifying assets
• If buyer has disposed of any qualifying assets in previous 3 years or is intending to in next 12 months then any gain on disposal
can be rolled over into the cost of the acquisition
VAT
Is VAT Chargeable?
• Art 5 VAT (Special Provisions) Order 1995 – where transferring as going concern, transaction will be VAT exempt
• If just several assets then VAT must be levied – s.4(1) VAT Act 1994
Transfer as going concern
2 conditions must be satisfied:
1. assets must be used by buyer in same kind of business as that carried on by seller and with no significant break
2. buyer must be a taxable person, or become a taxable person as result of the transfer
HMRC will only give an opinion of whether is within Art 5 or not where transaction has unusual characteristics
Stamp Duty
Rate of duty
• <£125,000 (<£150,000 for commercial property) – No Tax Payable
• >£125,000 <£250,000 – 1% of purchase price
• >£250,000 <£500,000 – 3% of purchase price
• >£500,000 – 4% of purchase price
• Where acquiring a business, must aggregate total value of all property and assess duty in this way
• Finance Act 2006 states that where partnership property includes land, there will be no stamp duty payable on transfer of interest
in partnership, so long as partnership’s main activity is profession or trade (other than developing land)
1. Parties
a. Does the business being sold have a separate legal identity or is the parent company the party (seller) to the contract?
2. Definitions
a. Do they match what is intended to be transferred as suggested by any heads of terms
i. Do IP rights need to be removed from goodwill?
b. Do the Schedules referred to match and represent what is intended to be transferred
3. Agreement for sale
a. Is it intended to be sold as a going concern and expressed correctly as such?
b. Are the assets listed correct?
i. Are there things in there that shouldn’t be or are the definitions of some of them too wide (see above)
c. What are the excluded assets as listed and are these comprehensive of what the buyer doesn’t want to acquire
4. Consideration
a. Correct value?
b. Expressed to be exclusive of VAT?
c. How are creditors dealt with:
i. How are they defined – correct?
ii. Value attributed to them correct?
d. How is consideration to be apportioned – considerations above should be addressed i.e. conflicting opinion between
buyer and seller as to how to apportion
5. Completion
a. What must be done?
b. What docs need to be produced?
i. Is there a clause requiring ‘any other docs that buyer reasonably demands’ as a condition too wide and too
vague
ii. Is the selling party changing the name/keeping the name resolutions?
1. who is actually changing name, if so – check parties to agreement and how in fact is agreeing to
change name
6. Contracts
a. Provisions for where they cannot be transferred?
i. Buyer undertake to perform as agent and indemnify if not
b. ‘best endeavours’ to ensure transfer too onerous?
7. Creditors and liabilities
a. If not assigned then buyer undertakes to pay and indemnify seller if not?
8. Name
a. Is seller agreeing to change?
b. If so, is it actually the selling party to agreement or a division of it that is agreeing to change?
9. Restrictive covenants
a. Too wide?
b. Too onerous?
c. Too long in years?
d. Protecting goodwill is the aim
10. VAT
a. Is it deemed to be excluded?
i. If so and HMRC deems it not to be excluded under Article 5 then seller will have to account so seller should
demand indemnity for any tax that HMRC chooses to levy
GROUPS
Advantages
• Each company = separate legal identity and limited liability
o Parent company not liable for debts of subsidiaries unless agrees to assume responsibility or there are special
circumstances
• Allows risky enterprise to be packaged into separate entity so any failure would not impact too heavily
• Often less cumbersome as can clearly divide management and parts of the business
• Also greater flexibility in acquisitions and disposals since easier to transfer entire subsidiary than a part of a business
• Capital gains advantages
• Other taxation advantages e.g. reliefs, stamp duty
Disadvantages
Administration
• Cost and hassle of maintaining separate statutory books and having separate annual accounts audited etc
Taxation
• Positives are that groups treated as single entity so intra-group transfers don’t give rise to tax
• Disadvantages:
o Group must meet various conditions to benefit from advantages
o Pitfalls in obtaining relief i.e. not making claims and elections in specified time limits
Benefits of capital losses cannot be transferred between members of the group
1. All 75% direct subsidiaries of principal will be part of the group; AND
2. All 75% sub-subsidiaries so long as they are also ‘effective 51%’ subsidiaries of the principal
a. i.e. B = 75% subsidiary of A
C = 75% subsidiary of B therefore a ‘75% sub-subsidiry’
Exit charge on company leaving group (accrues on 1st day of Accounting period in year asset sold)
• If company that receives asset then leaves group within 6 years then there will be an exit charge/degrouping gain/loss – s.179
TCGA 1992
• The company leaving the group will be deemed to have sold the asset it received immediately after receiving it for the value it
received it for, and then immediately re-acquiring it
• Company leaving group will be responsible to pay the tax but person buying the company will require a tax indemnity from the
seller
• Example:
o A buys land for £100,000 in 2002
o A transfers the land to wholly owned subsidiary B in 2003 for £150,000 (MV)
o B transfers the land to wholly owned subsidiary C in 2005 for £250,000 (MV)
o C leaves the group in 2007
o C is treated as disposing of the land in 2005 for £250,000 then immediately re-acquiring it
o Calculation =
Proceeds of sale: £250,000
LESS
Cost of acquisition: £100,000
EQUALS GAIN FOR PURPOSES OF EXIT CHARGE
£100,000
• Reliefs:
1. Existing company can, with agreement from another company in the group, elect to transfer the exit charge to that other
company in the group – s.179A TCGA 1992
a. If the exit charge gives rise to a loss, this loss can also be transferred in the same way
2. Exiting company can claim roll-over relief if it re-invests in qualifying business assets – s.179B TCGA 1992
Transferring an asset out of the group
• Gives rise to charge to corporation tax
• Calculation =
o Gain made on sale
LESS
o Cost of acquisition by member who first brought asset into group
Sale of shares
• If seller is a company then likely to be exempt from CGT as result of disposing of substantial shareholding in trading company
(10% or more) – HUGE ADVANTAGE TO SHARE SALE
Stamp Duty
• Can be avoided on intra-group transfer provided one company is a 75% subsidiary of the other or both are 75% subsidiaries of a
third – s.42 Finance Act 1930 (as amended)
• Rates on land (paid by buyer)
• <£125,000 (<£150,000 for commercial property) – No Tax Payable
• >£125,000 <£250,000 – 1% of purchase price
• >£250,000 <£500,000 – 3% of purchase price
• >£500,000 – 4% of purchase price
• Rate on shares:
o 0.5% to nearest £5 (rounded upwards)
Basics
• Membership of groups defined by percentage of ordinary share capital held by the parent
• 3 types of subsidiary – s.838 ICTA 1988:
o 51% - parent must own over 50%
o 75% - parent must own not less than 75%
o 100% - parent must own all
• Also ‘economic ownership tests
Beneficial ownership
• Parent company must retain beneficial ownership of appropriate share percentage in other company
Therefore:
• If a parent company enters into unconditional contract for sale (or conditional where condition can be waived by buyer) for entire
share capital of a subsidiary ceases to have beneficial ownership
o Any intra-group transactions should be completed before this stage to take tax advantages
1. Be beneficially entitled to
a. more than 50%; OR
b. not less than 75%; OR
c. 100%
of the profits available for distribution to equity holders of the subsidiary; AND
of any assets of the subsidiary available for distribution to equity holders on a winding up
of the profits available for distribution to equity holders of the subsidiary; AND
of any assets of the subsidiary available for distribution to equity holders on a winding up
Group Relief – s.402 ICTA 1988
General tax reliefs (not group specific)
Section of When will the loss have Against what will the loss be Which AP(s) are relevant?
ICTA 1988 occurred? set?
S393A Any AP of trading The company’s profits The AP of the loss and,
carry-across/ (income and capital) thereafter, the AP(s) falling in
carry-back the previous 12 months
relief
S393A The final 12 months of The company’s profits The AP of the loss and,
terminal trading (income and capital) thereafter, the AP(s) falling in
carry-back the three years previous to the
relief final 12 months of trading
(take later periods first)
S393(1) Any AP of trading Subsequent profits from the Subsequent AP(s) until the
carry- same trade loss is absorbed
forward
relief
• Claimant company sets these losses against its own taxable profits thus reducing its liability to corporation tax
o Claimant company must first deduct its own loses and charges before accepting the surrendering company’s
• Surrendering company can only surrender losses from current accounting period and claimant company can only set them against
profits from the corresponding period
• Possible to surrender different amounts to different members of the group
Applicable groups
• 2 companies where one is 75% subsidiary of the other; OR
• 3 companies where 2 are 75% subsidiaries of the 3rd – s.413(3) ICTA 1988
• Generally both surrendering and claimant company should be resident in UK though in limited circumstances, companies may
claim relief for losses incurred by subsidiaries resident in the EEA – Marks and Spender plc v Halsey (Inspector of taxes) [2007]
• Example:
c. Surrender all or part of the £50,000 loss to A, this reducing A’s profits to £100,000 and reducing A’s payment to tax
o On normal sale of company, arrangements not in place until acceptance (subject to contract or similar condition) of the
offer; OR
o Where disposal of shares requires shareholder approval, arrangements not in place until such approval is given or
directors are aware it will be given
o Arrangements might exist if there is an ‘understanding between the parties in the character of an option’ for a potential
buyer to acquire shares
Transfer of Undertakings (Protection of Employment) Regulations 2006
(TUPE)
When will TUPE apply
To relevant Transfers – Reg 3
Reg 4(3)
Any reference to a person employed by the transferor and assigned to the organised grouping of resources or employees that is subject
to a relevant transfer, is a reference to a person so employed immediately before the transfer, or who would have been so employed if
he had not been dismissed in the circumstances described in regulation 7(1)
Rights and liabilities which are not assigned under the regulations
• Criminal liabilities
• Rights and liabilities relating to provisions of occupational pensions schemes which relate to benefits for old age, invalidity or
survivors
Dismissal of an employee resulting from a relevant transfer – Reg 7
• If for reason connected with transfer then automatically unfair and gives automatic right to unfair dismissal claim (though must
still fulfil statutory qualifications i.e. 1 years continuous employment) – Reg 7(1)
o unless ETO justification – Reg 7(2)
What the buyer should check and what they should do to protect themselves
Things to check
• List of employees
• Their terms and conditions of employments
o Examine contractual terms since will be little scope to vary without employee consent
• Transferee should seek indemnity from transferor if due diligence shows terms and conditions different from those proposed in
the transfer
• Transferee wishing to change/harmonise should get transferor to dismiss employees (rarely effective to prevent liability passing to
buyer)
o Will be effective but will give rise to unfair dismissal claim unless ETO reason
Mere change in conditions does not constitute ETO reason
o Constructive Dismissal
If employer committed repudiatory breach of express/implied term of contract then employee can treat contract
as discharged and leave without notice AND bring claim of wrongful dismissal
• Employee must leave within reasonable period of employer breach otherwise deemed to have affirmed
contract
• Repudiatory breach = unilaterally altering contract/breaking implied duty of good faith e.g. by
humiliating employee in front of colleagues, imposing unreasonable work demands...
• Employers defence
o Employee commits repudiatory breach such as revealing confidential info
o Can use defence even if didn’t know of breach at time of dismissal
o Where employer makes payment in lieu of notice, this will be deducted from damages
o If dismissal and disciplinary procedures or grievance procedures were not completed before tribunal started:
Mainly employee’s fault – damages reduced 10-50%
Mainly employer’s fault – damages increased 10-50%
• Employers Defence
o If based on misconduct, cannot rely on misconduct they discovered after the dismissal, though the tribunal may reduce
compensation payable
• Remedies
o Reinstatement or re-engagement
Same job or comparable job with same or associated employer
Employee must ask for this remedy
Rarely used
o Compensation
Basic Award
1. Final weekly gross pay x length of service (max of £310 per week and 20 years)
2. Multiplier depending on age during those years of service:
a. 41and above = x11/2
b. 22 to 40 = x1
c. Below 22 = x1/2
3. Can be reduced due to employee’s contributory fault
4. CALCULATION = Length of service X multiplier X weekly gross salary
Compensatory Award
• Such as tribunal considers just and equitable as consequence of employer dismissing up to maximum
of £60,600
• Calculated under following heads
o Immediate loss of net wages from date of dismissal to hearing (assuming has not got another
job yet)
o Future loss of net wages (how long may take to get new job?)
o Loss of fringe benefits
o Loss of statutory protection (will have to rebuild against a new employer his rights to
redundancy payment etc
• Tribunal will deduct any payments made by employer in lieu of notice or ex gratia
• Can be reduced due to employee’s contributory fault
o If dismissal and disciplinary procedures or grievance procedures were not completed before tribunal started:
Mainly employee’s fault – damages reduced 10-50%
Mainly employer’s fault – damages increased 10-50%
Redundancy - statute
• Paid by employer
• Should be reasonable i.e. consult employee and offer alternative employment in company
• If fails to pay or calculation disputed, refer to tribunal within 6 months
o [FIRST] – Employee:
Must prove ‘qualifying employee’
• Must have 2 years continuous employment to date of dismissal
Must prove has been dismissed
• Actual dismissal with or without notice; OR
• Constructive Dismissal (repudiatory breach by employer)
• Failure to renew fixed term contract on expiry
Overlapping claims
• If dismissal unfair and without proper notice (or within fixed term) then employer may claim both unfair dismissal and wrongful
dismissal
o Compensation not awarded for same loss twice
Compensation for immediate and future losses under unfair dismissal will reduce damages for wrongful
dismissal
Terminology
• MBO = target acquired by some or all of management through Special Purpose Vehicle (‘Newco’) established for this purpose
• MBO can be share or business acquisition and may involve hive-down
• MBI = external management team brought in
• BIMBO = ‘Buy-in Management Buy out’ i.e. combination of MBI and MBO
Process of a PE transaction
1. Investment Paper put together
a. PE fund will investigate potential target using the key assumptions as basis
2. Investment committee approve ‘in principle’
a. Committee considers proposal (strengths, weaknesses, potential pitfalls)
b. Test against key assumptions and PE fund-specific criteria
3. Investment offer made to target
a. If accepted, negotiation of terms starts
4. Final investment committee approval
a. By this stage the Ts and Cs will have been finalised
Completion of investment
Funding
• usually combination of debt and equity
• Managers will prepare plan to attract PE and Venture Capitalists
• Will often involve several PE houses bidding to be involved
o At start of due diligence process there will be auction process
• Additional documentation required:
o Investment Agreement between managers and PE provider
• More people involved:
o Management and Lawyers
o PE and Lawyers
o Banks and Lawyers
2. Exit
a.Generally looking to realise investment 3-5 years from outset by:
i. Sale’ OR
ii. IPO; OR
iii. Secondary buyout by another PE investor
3. Good management team
a. PE fund will want non-exec majority, usually
b. Will reserve right to put in their own management team
4. Control (see below)
Security and Control
• PE will want control because:
o Will likely be minority shareholders both at member and board level
• Acquisition documentation, specifically the articles of Newco, will deal with realisation:
o Exit provision for 3-5 years down the line by:
• Flotation (usually most desirable); OR
o Common for provision to allow redeemable preference shares to be converted to ordinary
shares prior to them being admitted on the Stock Exchange
o Should allow for drag-along/tag-along rights
o Provisions for protection of PE investment since will likely be minority shareholder
• Further buy-out; OR
• Sale of Newco
• Warranties
o Given by Sellers to NewCo2
• Sellers likely to be managers of NewCo2, too)
o Given by NewCo1 to PE
o Sellers will resist extensive warranties as buyers likely to have more knowledge about business generally; THOUGH
o They should be prepared to give full warranties
o Specific warranties:
• By management team of their business plan
• Key information acquired through due diligence
Share transfers
• Prohibited transfers
o Of shares by management to incentivise them to work hard in making the business successful
• Permitted transfers
o Transfers that can be done without prior need for consent e.g. PE to other member of its group
o Management to family members or trust
• Pre-emption
o Check if there are any pre-emption rights for 3rd parties either under s.89 or in articles
• Leavers
o If management member leaves they will normally be required to sell their shares in prescribed manner and at
prescribed price.
o Price will depend on whether they are a good or bad leaver:
Good Leaver
• Price of shares will be MV at date of proposed transfer
Bad leaver
• Lower of value at date of transfer or issue price
Buyer must buy same proportion of minority shareholder shares as they do PE shareholder
• Exit provisions
o Protection of investment (including drag-along and tag-along)
Some procedural requirements for corporate sellers and buyers
Compliance with the constitution
1. Objects in seller’s memo must allow sale of business
2. Notice, Conduct and Quorum requirements in articles must be complied with
3. Article may simply allow directors to conduct under TA70 or they may need member consent
The company is a WHOLLY owned subsidiary of another body corporate (CA06 s.190(4)(b)
• i.e. NewCo2 will not need approval of members, but NewCo1 may still need to get its members’
approval if it has a director who is also a director of NewCo2 (see s.190(2) above)
• Where consent is not obtained:
o Contract voidable
o Director who undertook is liable for losses and must account for any gains
HOW TO APPLY:
1) Must be a transaction between a Company and one of its Directors, or a person connected with the Director
a) Connected persons:
i) Family (CA06 s.252(2)(a))
(1) Defined in s.253(2)(a) to include marriage etc
ii) A body corporate with which the director is connected (CA06 s.252(2)(b))
(1) Connected if he and the person connected with him to the body corporate are interested in at least 20% of nominal
share capital/exercise or control the exercise of more than 20% of voting power at any GM of that body (CA06
s.254(2)(a and b)
(a) BASIC EXAMPLE - if you have a 55% share in a holding company which has a 60% interest in the subsidiary,
you have an interest of 33% in that subsidiary which is more than 20%, therefore you are connected i.e. if you
control a Co. which controls another Co. (CA06 s.254(4))
2) Must be a Non-Cash Asset
a) NCA defined in CA06 s.1163:
i) Any property or interest in property, other than cash (s.1163(1))
ii) The creation or extinction of an estate or interest in, or a right over, any property (s.1163(2)(a))
iii) The discharge of a liability by any person, other than a liability for a liquidated sum (s.1163(2)(b))
3) The NCA must be of substantial value:
a) Substantial Value defined in CA06 s.191 as either:
i) Exceeding 10% of company’s asset value and is more than £5,000, OR
ii) Is more than £100,000
Payments to directors in connection with the transfer of undertaking (business acquisition)
• S.218 CA06
• If payment made to director in connection with transfer and by way of compensation for loss of office or as consideration for or in
connection with his retirement from office then the proposed payment (including amount) must be disclosed to members and
approved by OR
o If this is not done, director holds payment on trust for company and director responsible for making will have to
indemnify company for any resulting loss
• Does not apply to bona fide payments by way of damages for breach of contract or by way of pension in respect of past services –
s.220
Their effect
If a condition is not (but may still be, or may not be) achieved
1. Extend period for fulfillment of condition
2. Waive condition
3. Alter price
4. Walk away
Causes of delay
1. Obtaining consents of landlord to assignment of leasehold premises
2. Entering into arrangements with 3rd parties re: fundamental contracts (novation, assignment or fresh agreements)
3. Removing charge from assets
4. Obtaining consent of charge-holder for asset to be transferred subject to the charge
5. Receiving confirmation from floating charge-holder that charger has not crystallised
Conditions precedent
What they are and provisions in the acquisition agreement
• Specified conditions that must be fulfilled – commits both parties to acquisition except where conditions not fulfilled
• Following provisions are usual to include:
1. obligation on one party to take all reasonable steps to try to procure satisfaction of condition as early as possible; AND/OR
2. Undertaking by both parties to cooperate in procurement of fulfilment of condition
3. long-stop date by which conditions must be satisfied (or waived by benefiting party) and, in default, provision for agreement
to terminate automatically without any liability attaching to either party
4. if conditions satisfied prior to long-stop date, provision for completion to take place within specified period of this happening
1. obligation on one party to take all reasonable steps (or ‘best endeavours’, depending on who working for) to try to procure
satisfaction of condition as early as possible; AND/OR
a. Undertaking by both parties to cooperate in procurement of fulfilment of condition
2. long-stop date by which conditions must be satisfied (or waived by benefiting party) and, in default, provision for agreement
to terminate automatically without any liability attaching to either party
3. if conditions satisfied prior to long-stop date, provision for completion to take place within specified period of this happening
4. Seller to continue to run business in ordinary way
a. Seller will agree not to do any of the following without first obtaining buyer’s consent:
i. Enter into contracts or other commitments involving expenditure exceeding a specified amount
ii. Appoint any additional directors
iii. Lend or borrow money except in routine matters ordinary course of business
iv. Grant any mortgage, charge or debenture over assets
v. Settle any claim or dispute
vi. Acquire or agree to acquire any property, commit itself to capital expenditure or enter into any hire-
purchase or leasing agreements
vii. Enter into any agreement or dispose of all or part of its business or assets except in relation to routine
matters in the ordinary course of business
viii. Alter terms of employment of any employee or director
5. Buyer may demand to have some managerial control ie. Right to attend board meetings
6. Repetition of all warranties by seller at completion
a. seller may be allowed to disclose in interim period but buyer will retain right to remedy of this breaches previous
warranties (provides remedy whilst preventing acquisition falling through because of material breach)
7. Right to terminate
a. Material breach of warranty?
b. Material adverse change in the business?
c. Loss of specific contracts key to the business?
Pre-completion preparations by seller or its solicitor
Statutory books and filing requirements
• Ensure complete and up to date
• Register if members, directors and charges must be accurate
• Minutes properly written up
• Stock transfer forms duly stamped
• Share certificates available for all issued shares of target
• All filings at CH complied with:
o Accounts and annual returns filed
o Notices of increase ASC, share allotments and changes of director/secretary duly given
o Charges register doesn’t reveal any debenture which has been repaid (memo of satisfaction should have been
forwarded to Registry)
Title deeds
• Collect all those not subject to charge to pass to buyer on completion
• If charges to be released on completion, arrangements for charge-holder to pass over deeds on completion
Powers of attorney
• If individual seller cannot attend signing meeting, may appoint proxy to attend that and any other completion meetings
o Form appointing proxy to be deposited at registered office not less than 48 hours before meeting
• Must ensure completion board meeting is quorate
o Any director unable to attend should appoint proxy to attend and vote on behalf if articles allow (Table A 64-69
does)
Corporate buyer
• Board meeting of buyer held prior to completion
o Approve and enter into Investment Agreement
o Approve terms of draft acquisition agreement
o Authorise signing of the agreement and completion of acquisition
o May appoint director committee to attend completion on behalf of company
o Certified copy of these minutes handed over to seller to prove authority to complete etc
o If consideration partly or wholly shares, may need to increase ASC and authorise dirs to issue
Completion (generally the below will happen simultaneously)
Completion Meeting
Generally
Where no delay between exchange and completion, following will happen at it:
1. Seller’s solicitor delivers
a. disclosure letter
2. Parties sign and exchange:
a. Investment Agreement (NewCo 1, PE house, Bank…);
b. Acquisition agreement and any tax indemnities (NewCo 2, Seller)
c. if signed by attorney, also deliver power of attorney
3. Each seller signs stock transfer form and delivers this will relevant share certificates
4. Completion board meeting of target is held
5. Directors’ service agreements are signed and exchanged
6. Outstanding loans by seller(s) to company or vice versa may be discharged
7. Seller’s solicitor delivers
a. statutory books
b. title deeds to properties (including any certificates of title given by seller’s solicitor)
c. documents of title relating to other assets
d. originals, counterparts or certified copies of licences to assign leasehold property, novation agreements and consents
from third parties to assignment of contracts
e. financial records and books of account, customer lists, computer programs, designs, drawings, plans, sales and
promotional materials, national insurance, PAYE and VAT records, employee records and other docs required to run
the business
i. seller reserves right for limited period after to take copies of these for their own records
f. agreements to which target is party
g. duly executed releases of charges over assets and confirmation of non-crystallisation of charges
h. insurance policies
i. certified copy of special resolution of selling company to resolve to change its name
j. where seller is company, board resolution authorising representative to sign the documentation
8. Buyer’s (NewCo2) solicitor delivers:
a. banker’s draft for cash consideration
b. share certificates for any consideration in shares
c. board resolution authorising representative to sign transaction documentation
NB - Where there is a delay, (1) and (2) will happen at exchange and the rest at completion
Business Sale
• Any land included must be transferred by deed (assignment, transfer or conveyance as appropriate)
• Assignment of certain IP rights as appropriate
• Goodwill and benefit of contracts may also be assigned
• Title to loose machinery etc simply passes on delivery
Completion EGM
• Buyer of shares doesn’t become member of target until name entered on register of members – s.22 CA85/s.112 CA06 from Oct 08)
• Registration cannot take place until stock transfer form properly stamped so buyer will not be able to exercise voting rights
on completion of acquisition
i. Parties normally agree that selling shareholder will pass any resolutions necessary for buyer on completion
1. buyer’s solicitor will forward draft minutes to seller in anticipation of the meeting
Insurance
• Buyer should arrange for insurance on assets beginning on:
• Date of completion; OR
• If contract conditional, on satisfaction of conditions
Post-completion
Buyer’s solicitor
Filing at CH
1. Form 287 – s.87 CA06
a. change of registered office
b. changes of directors and secretary
c. change of accounting reference period
2. Copy of letter of resignation of auditors within 14 days – s.517 CA06
3. Copies of any SRs of the company
4. print of new articles
Both parties
Bibles
• Copies of complete set of documents used in acquisition
• Used as source of reference if any problems crop up (such as warranty issues)
CORPORATION TAX CALCULATIONS
REVENUE LAW: CORPORATION TAX (CT)
CALCULATION
STEP 1: Calculate ‘INCOME PROFIT’
STEP 2: Add CHARGEABLE GAINS
STEP 3: Calculate ‘TOTAL PROFIT’
STEP 4: Deduct and CHARGES ON INCOME AND CAPITAL
STEP 4: Calculate the TAX
CHARGEABLE RECEIPTS
Less
DEDUCTABLE EXPENDITURE
Less
CAPITAL ALLOWANCES
TRADING PROFIT (OR LOSS)
LESS DEDUCTABLE EXPENDITURE: Particular examples of deductible expenditure for a company are:
• Directors’/employees’ salaries or fees and benefits in kind.
If the salary is paid for personal reasons and not wholly and exclusively for the purposes of the trade, then it will not be
deductible.
Copeman v William J Flood and Sons Ltd – a substantial salary paid to a director who performed minimal duties
should be apportioned into two parts; that part which was reasonable for the duties performed would be deductible in
calculating the company’s taxable profits and the other excessive part would not.
• Contributions to an approved pension scheme for directors/employees or health insurance These are fully deductible.
• Payment to a director/employee on termination of employment. Where a payment is made to a director/employee by way of
compensation for loss of office or employment, this will qualify as a deductible expense under the normal rules.
Where a payment is made in return for a director’s/employee’s undertaking not to compete with the company’s business
following termination of his office or employment, such a payment is deductible under specific provisions (s 225 Income Tax
(Earnings and Pensions) Act 2003).
• Interest payments on borrowings. These will generally be deductible under the loan relationships rules.
LESS CAPITAL ALLOWANCES:
Normally 25% of value of pool
Enhanced First Year Allowance for newly acquired goods for SMEs
o (50%) Small Enterprise – must satisfy at least two of the following criteria:
annual turnover of not more than £5.6 million
assets of not more than £2.5 million
not more than 50 employees
o (40%) Medium-sized Enterprise – must satisfy at least two of the following criteria:
annual turnover of not more than £22.8 million
assets of not more than £11.4 million
not more than 250 employees
less
ACQUISITION COST/VALUE
less
INCIDENTAL COSTS OF ACQUISITION
(e.g. legal fees/agent fees)
less
SUBSEQUENT EXPENDITURE
(any expense incurred ‘wholly and exclusively in enhancing asset’s value (s38))
GAIN (before indexation) or LOSS
NOTE:
a. For a company the indexation allowance will be given for the period between the date of the acquisition of the asset (or 31
March 1982 if later) and the date of disposal No Restrictions
b. The indexation allowance can reduce the gain to zero, but cannot create or increase a loss.
c. If the disposal of a chargeable asset leads to a loss (ignoring indexation) that capital loss can be deducted from other
chargeable gains made by the company in its accounting period, but not from income profits. Any unused loss can be carried
forward to be deducted from the first available chargeable gains made by the company in subsequent accounting period(s)
(until the loss is absorbed).
d. If a company sells an asset at undervalue, a decision must be made as to what figure to use for the proceeds of disposal. If the
sale is merely a bad bargain then actual sale price will be used, but if there is a gift element then the market value of the
asset will be used.
e. If the company sells to a ‘connected person’, the sale will be deemed to take place at market value. A company is
‘connected’:
with a person if that person controls the company (alone or with others connected to him).
to another company if they are both controlled by the same person or by a combination of that person and others
connected with him (s 286(5) TCGA 1992).
EXEMPTIONS
‘Wasting assets’ which have a life of under 50 years (ss44-45)
Tangible moveables if the consideration is less than £6,000 (s 262)
Substantial shareholdings (Sch 7AC - inserted by FA 2002)
• A trading company disposes of a substantial (10% or more) shareholding in a trading company or a holding company of a
trading group, and
• The investing company has held 10% or more of the ordinary shares in the company invested in for at least 12 months in
the 2 years before the disposal
RELIEFS
Roll-over relief on the replacement of ‘qualifying assets’(ss 152-157)
‘Qualifying assets’: a) goodwill and b) land and c) fixed plant and machinery (ss155-156)
• A replacement is acquired either within 1 year prior to the disposal or within 3 years after the disposal
• The replacement asset does not have to be of the same kind as the asset disposed of
NOTE: Relief is restricted if the asset is not used in the seller’s trade throughout the period of ownership or if the whole
proceeds are not reinvested in a new qualifying asset.
Roll-over relief on paper for paper transactions (ss127-137A)
Any profit on the disposal of intangible fixed assets may be rolled-over into the acquisition of replacement intangible fixed assets
(provided the qualifying conditions are met) thus deferring any corporation tax charge arising from the disposal. Otherwise profits and
losses on disposal will generally be accounted for in the income profit/loss calculation.
The treatment of intellectual property and goodwill for tax purposes will, in general, reflect the UK Generally Accepted Accounting
Practice (GAAP) or International Accounting Standards (IAS) and so reference will need to be made to a company’s accounts to
establish the exact effect of that treatment on a company’s profit or loss for the accounting period in question.
STEP 3: CALCULATE ‘TOTAL PROFIT’
Total profits = income profit + capital profit
Tax on profits over £1,500,000 (If exceeds 1.5m then all is taxed at 30% - no 30%
division) the ‘mainstream corporation tax’
Tax on profits between £300,000 and £1,500,000 32.5%
relief is given at this marginal rate
Tax on profits not exceeding £300,000 20%
the ‘small companies rate’
NOTE: Franked investment income is ignored when paying tax, but it is included when calculating the rate of tax applicable.
DIVIDENDS
Dividends paid by a company are not deductible in calculating the company’s taxable profit, but are treated as distributions of profit.
Similarly, when a company buys back its own shares from shareholders, the payment is not deductible in calculating the company’s
taxable profit and that part of the price which is over and above the allotment price may be treated in the same way as a dividend.
Neither of these payments reduces the company’s profits chargeable to CT.
PAYMENT: For most companies, the corporation tax due under self-assessment is payable within nine months and one day from the
end of the relevant accounting period (TMA 1970, s 59D). The company must make a payment to HMRC within this time limit in
relation to its anticipated corporation tax liability for that period, even though the final assessment may not have been agreed with
HMRC by that stage (the deadline for the self-assessment return itself is 12 months after the end of the relevant accounting period).
Large companies may, depending on the company’s overall corporation tax liability, have to pay the tax in four instalments (TMA
1970, s 59E). A ‘large’ company for these purposes is one with annual profits of £1,500,000 or over. The instalment due dates are
calculated by HMRC as:
First 6 months and 13 days after the start of the accounting period
Second 3 months from the first instalment due date
Third 3 months from the second instalment due date
Fourth 3 months and 14 days after the end of the accounting period
EXAMPLE:
Large Co plc is r equired to p ay c orporation t ax by instalments for its accounting period ending 31 December 2007. These
instalments will be due on 14 July 2007, 14 October 2007, 14 January 2008 and 14 April 2008.
Under the systems for large and other companies, payments are likely to be made based on an estimate of the company’s final liability.
Any adjustments necessary are made once the final liability is known.