Q: Acquire shares or just the assets?
A: Usually the shareholders of the target company wish to dispose of their shares in order to take advantage of taper relief and substantial shareholding exemption for Capital Gains Tax (CGT).

From the buyer's perspective there are sometimes tax losses in the target company which can be utilised and there are issues such as stamp duty which could be significant if the assets include a land or buildings with substantial value.

However, one major consideration in the acquisition of shares in the company is that the buyer would normally be taking on all the liabilities of the company and it is essential that a very thorough due diligence exercise be undertaken.

This is why it can often be attractive to a buyer to try to cherry pick certain assets and leave behind the liabilities in the company. However there may be some liabilities which will pass in any event, in particular, if the essence of business is being acquired the transfer of undertakings (TUPE) regulations will apply in respect of employees.

Q: How do we set the price?
A: There are various accounting methods of valuing shares but inevitably you will have the financial position of the company assessed by your accountant.

There are intangibles such as the goodwill of the company which may be more difficult to value and, as with most other transactions, the matter ultimately comes down as to how much you are willing to pay and how much the seller is willing to accept.

There can also be a certain element of 'earn out' where the final amount payable to the seller depends on the future performance of the company.

Q: If figures aren’t finalised by completion
A: It’s not uncommon for there to be adjustments to the price depending on the financial position of the target company on the completion date.

This may be on the basis of the value of a single asset, such as stock, which will need to be valued, or it could be of a more general nature with an accountant certifying the financial position of a company once all relevant information is to hand.

The share sale agreement will specify a formula by which any adjustments to the price are to be calculated.

Q: How do we pay for the company?
A: There are three basic means of payment – shares, loan capital and cash. Whilst there is nothing to prevent an unlisted company from issuing shares for an acquisition, in practice sellers are not normally willing to accept such shares as there is no ready market for them.

Also the buyers may not wish to have their controlling position in the company diluted.

Q: Can we use company funds or assets?
A: The general rule is that it is illegal for a company to give financial assistance for the purchase of its own shares.

There are some exceptions to this rule which apply in limited circumstances and which require detailed procedures to be followed. Great care needs to be taken as a breach of the rule can be a criminal offence and breaches can be triggered inadvertently.

Q: What is meant by due diligence?
A: This is a term commonly used to describe the investigation into the affairs of the target company.

Whilst this is primarily a financial and legal investigation, it may also be a business one, for example, checking out the quality of the company's customer book and also a physical one on the condition of assets such as buildings, plant and machinery.

The extent of the investigation will depend on the circumstances of the transaction. Short cuts on due diligence is generally a false economy.

Q: Can we protect against future problems?
A: It’s usual to require warranties which are written representations given by the seller on various matters relating to the company's position.

These may be simple ones, such as representing that the company has no actual or threatened litigation against it, to complex ones relating to the company's tax affairs. The warranties are often qualified by reference to a statement signed by the seller setting out the material information disclosed to the buyer.

If within the warranty period a liability arises which is covered by a warranty, but was not disclosed by the seller, then a claim will arise. Warranty claims are often limited by both time and amount.

Q: What about the employees?
A: If it’s the shares of the company which are being acquired, the employer - which is the company - will not change and the employees will continue to be employed.

If assets are acquired then if there is a transfer of an 'economic entity' the TUPE regulations will apply and the employment contracts of the relevant employees will be automatically transferred to you. Employees can be made redundant but only on technical, organisational or economic grounds, but if this is envisaged great care needs to be taken.

As part of the due diligence exercise investigation should be carried out into the position of staff and, for example, whether key staff will remain after the takeover and whether there any existing or potential claims.

Q: How do we transfer the company's business?
A: Apart from the usual business skills in making sure that key staff and customers are treated correctly, you might also want to consider continuing to employ the seller on the basis of a consultancy/service contract, assuming that they have been involved in the day to day management of the business.

These contracts are normally on a fixed term basis although it is not uncommon for a seller to get itchy feet and look to leave before the contract expires.

Q: Can we stop the seller competing with us?
A: Yes, provided that any restriction imposed on them is reasonable to protect the company's interest. It is usual to include restrictive covenants in the share sale agreement and they would be defined by reference to time, geographical area and type of business, the extent of which depends on the factors such as the type of company, the nature of its operations and the area which it serves.

Q: What if it’s a joint venture purchase?
A: It’s usual for there to be a shareholders/joint venture agreement to regulate relevant matters between the buyers/investors.

As to what is covered will depend upon the particular circumstances, but typically would include matters relating to the provision of funding share allocations and whether there are different types of share carrying different rights; provisions which prevent the majority shareholders from abusing their dominant position; and if there is a sleeping or venture capitalist type partner, requirements for the provision of information and for board representation.

It’s also common for there to be pre-emption rights giving other shareholders the right of first refusal should one of them wish to sell their shares, and to restrict circumstances under which the shares can be sold to third parties.

Q: What tax issues arise?
A: Of course there are plenty of tax issues to consider, but that’s another story on its own.