Mergers and Acquisitions: A Guide for Businesses

Overview

A merger or acquisition can help a business grow, enter a new market, acquire staff or technology, or transfer ownership. It can also expose buyers and sellers to significant financial, legal and operational risks.

Business owners commonly want to know whether to sell shares or business assets, what information should be disclosed, how the purchase price will be protected and what happens to employees, contracts and liabilities.

This guide outlines common legal considerations for business acquisitions involving England and Wales. It is general information, not advice on a particular transaction. Alstern Solicitors may be able to assist with transaction planning, due diligence, negotiation and documentation, subject to confirming the firm’s service scope.

Key Legal Considerations

What is the difference between a share purchase and an asset purchase?

• Share purchase: Shares in the company. The company remains the same legal entity. Its assets, contracts and liabilities generally remain with it.
• Asset purchase: Selected business assets and, where agreed, specified liabilities. The parties must identify what is transferring and address contracts, property, employees, licences and third-party consents.
• Merger or reorganisation: A wider commercial description that may involve different legal structures. The transaction documents and legal steps depend on the structure chosen.

The Companies Act 2006 provides the statutory framework for companies and contains directors’ duties, including duties to act within powers and promote the success of the company.

What happens during due diligence?

Due diligence is a review of information about the target business. Its scope varies, but may include:

• accounts, forecasts, funding and tax information;
• key customer, supplier and finance contracts;
• ownership of shares, property, intellectual property and other assets;
• disputes, complaints, regulatory matters and insurance;
• employees, pensions and other workforce matters; and
• the company’s records, governance and material liabilities.

The purpose is to identify issues before signing or completion. Findings may affect the price, transaction structure, warranties, indemnities, conditions or whether the buyer proceeds.

What are warranties, indemnities and conditions?

The sale agreement commonly sets out the parties’ obligations and the risks each will bear.

• Warranties are contractual statements about the business. A buyer may have a claim if a warranty is untrue, subject to the contract’s terms and any applicable legal requirements.
• Indemnities allocate specified risks by requiring one party to compensate the other for defined losses or liabilities.
• Conditions may require an event or approval before the parties must complete.
• Completion arrangements record how payment, share transfers, asset transfers and other steps will take place.

The wording, disclosure process, financial caps, time limits and claim procedures should be negotiated for the particular transaction.

Are approvals or regulatory checks required?

Possibly. Depending on the transaction, the parties may need to consider:

• company approvals and authority under the company’s constitution;
• lender, landlord, customer or other contractual consents;
• competition and national-security screening;
• permissions or notifications for regulated businesses; and
• additional requirements for public company transactions.

Do not assume that signing a sale agreement means the transaction can complete immediately. Regulatory or third-party approval requirements should be identified early and reflected in the transaction timetable.

What happens to employees and contracts?

The effect depends on whether the transaction is a share purchase or an asset transfer and on the facts. A business transfer may engage the Transfer of Undertakings (Protection of Employment) Regulations 2006. The parties should assess whether the regulations apply and consider information, consultation and employee-transfer obligations where relevant.

A share purchase usually leaves the company as the employer and contracting party. An asset purchase may require steps to transfer or replace employment, customer, supplier, property or licence arrangements.

When does the transaction complete?

Signing and completion may occur at the same time or on separate dates. Where they are separate, the agreement should set out what must happen before completion and what each party may or must do in the interim.

Completion may involve payment, transfer documents, resignations and appointments, releases of security, delivery of records and other agreed steps. Corporate documents must be executed in a legally effective way. For example, the Companies Act 2006 sets out methods by which a company may execute documents.

What Factors Are Usually Considered?

• Commercial objective: what the buyer wants to acquire and what the seller wants to achieve.
• Transaction structure: whether a share purchase, asset purchase or alternative arrangement best fits the parties’ objectives.
• Value and payment: price, payment timing, retention, deferred consideration or earn-out terms.
• Financial and legal risk: liabilities, disputes, contracts, assets and information found in due diligence.
• Approvals and consents: regulatory, corporate, lender and third-party requirements.
• Employees and business continuity: workforce obligations and the practical impact on customers and operations.
• Tax and accounting: transaction-specific consequences requiring appropriate specialist input.
• Timing and implementation: conditions, completion mechanics and post-completion responsibilities.

Common Mistakes or Risks

• Choosing a structure too early: a share and asset purchase can have different consequences for liabilities, contracts and implementation.
• Relying on incomplete due diligence: undiscovered issues may affect the business’s value or future operations.
• Using generic transaction documents: standard wording may not properly allocate the risks identified in the deal.
• Overlooking consents and approvals: missing a required consent can delay or prevent completion, or result in a contractual breach.
• Assuming all liabilities transfer, or none do: the result depends on the structure, law and transaction documents.
• Ignoring employee matters: failing to assess applicable transfer obligations can create legal and practical problems.
• Leaving regulatory checks too late: a required review or notification may affect whether and when the deal can complete.
• Treating signing as completion: separate completion conditions and steps may remain outstanding.

Case Study from Alstern Solicitors

Background

A business owner is considering selling a company to a buyer who wants to acquire its customer relationships, equipment and staff.

Challenge

The parties initially describe the deal as a “business sale” but have not decided whether the buyer should acquire shares or selected assets. They have not reviewed all key contracts or identified whether third-party approvals may be needed.

How We Assisted the Client

In a matter of this kind, a solicitor could clarify the proposed structure, coordinate due diligence, identify contractual and regulatory issues for further review, and help negotiate the sale documents and completion steps.

Outcome

The parties may be better placed to proceed, renegotiate or pause once the structure, risks and required approvals are understood. The appropriate outcome depends on the evidence and the parties’ commercial objectives. No transaction outcome can be guaranteed.

What Happens If You Choose the Wrong or Inexperienced Solicitor?

A transaction may be delayed or expose a party to avoidable risk if the legal work does not match the commercial structure. Potential problems include:

• insufficient investigation of liabilities or title to assets;
• unclear warranties, indemnities or price-adjustment provisions;
• missed approvals, consents or regulatory requirements;
• incomplete transfer or completion documents; and
• inadequate attention to employee or post-completion obligations.

Businesses should seek advice suited to the transaction’s structure, size, sector and cross-border features.

How Can Alstern Solicitors Help?

Alstern Solicitors may be able to advise on corporate and commercial transactions, including transaction structure, due diligence, negotiation and legal documentation. The firm’s corporate and commercial service offering should be confirmed before publication.

Any engagement should include clear information about scope, fees, key assumptions and the need for specialist tax, accounting or regulatory advice where appropriate.