No, we aren’t talking Gwyneth Paltrow and celebrity divorce. Rather, this blog considers M&A transactions involving a ‘transaction perimeter’ and some of the issues to be alert to when embarking on this kind of deal.
The transaction perimeter – what is it, and when is it relevant?
The phrase is used where there is a group of companies, but only some of them are to be purchased as part of a transaction. Those companies which are being purchased are said to form part of the ‘transaction perimeter’. By way of example, the red line below denotes the transaction perimeter, therefore B and D are within it and will be purchased, but A and C fall outside of it and will not.
- Who are the sellers?
This may seem an obvious point, but it is one to be clear about from the beginning. Using our above example, the seller will be A. Is A of an acceptable covenant strength, or do its ultimate owners need to stand behind its obligations personally? If so, this needs to be documented.
- The excluded companies
Thought needs to be given in our example to C. The shares in C would need to be transferred pre-completion to take it out of the transaction perimeter. It would be normal for the seller to be responsible for this, but how will the risk of any liabilities (e.g. possible tax charges) be apportioned? Will B have the benefit of any of the seller’s tax or restructuring advice? Does B need its own advice for any re-organisation of the post-completion group?
- The assets
Let’s imagine that C holds an asset required for B to carry on its business. This could be intentional, or a historical quirk when the asset was purchased years ago. How will this be dealt with? There could be an asset transfer at or before completion, or an agreement between the parties to permit on-going use. Again, structuring advice is required and any agreement needs to be properly documented to enable the buyer to trade B’s business without interruption post-completion. This may go far beyond individual assets, and could also apply in reverse with C needing co-operation from B.
- Further assurance
What about if the example at 3 is repeated, but the true ownership of the asset is only discovered after completion? Should the agreement have contained a clause requiring the transfer of any such asset at nil consideration? Again, this needs to be considered and documented.
As can be seen, this type of transaction throws up some particular challenges which need to be agreed, and properly documented. We’ve only scratched the surface of the issues here so if you are approaching this type of deal:
- take legal advice early – agreeing any transaction specific points at an early stage will save time and cost further down the line; and
- take taxation and other structuring advice at the outset – the deal structure could take any number of forms.
This blog post was written by Matthew Lappin. For further information, please contact:
Sophie Brookes, partner, Corporate
T: 0161 836 7823