As we enter a new decade, the Boyes Turner technology and innovation group is busy making and breaking our new year’s resolutions (dry January seems a little ambitious for some!).
For those considering an exit or wishing to secure investment into their company in 2020, some early year preparation will significantly reduce delays to any future transactional timetable and also ease deal stress. So, make your 2020 resolution to review each of the points below for a well-prepared, orderly, deal process.
1. Group Structure
It is always recommended to review the existing group structure and ensure that the target company can be “packaged” as a streamlined and efficient corporate structure, particularly if there are multiple or overseas subsidiaries or if there is an intention to carve out parts of the business that will not be sold. Where there are non- trading companies, these should be wound-up as it’s very unlikely that buyers or investors will want to take on any unnecessary business entities that could also potentially, be carrying liabilities. In technology rich companies we often see that purchasers would prefer to purchase certain assets, for example the intellectual property rights, source code and select customer contracts. In this case, it is important to conduct an internal review to ensure that you can produce detailed information regarding these assets to the purchaser upon request.
If you have decided to carve-out specific assets from the sale, this should be considered well in advance of seeking a purchaser and it’s advisable to consider the likely questions that will arise in the buyer’s due diligence around this point. For example, will the target business’ real estate interests be transferred to the buyer as part of the deal and/or would you still intend to share property space with the sold business after completion? Would you want to sell to the same customer base as the parts of the business that has been carved out and sold? Consider carefully any pre-existing joint-venture agreements or other information-sharing ventures to decide if that is something you intend to continue to participate in after completion. Once you’ve clarified the scope of the target business, early professional advice should be sought to ensure that all legal, accounting and tax elements are aligned so that any required pre-completion group re-organisation steps are in place.
You should also be prepared to seek advice from local lawyers if there is an international element to your business.
2. Third Party Consents
Despite parties working hard to meet a mutually agreed timetable, one of the biggest frustrations is when completion is delayed due to the requirement of obtaining third party consents. Typically, the types of consents that are a pre-requisite to closing involve landlords, lenders or material customers and suppliers. If you already have existing investors, there will also be an investors agreement in place which will require certain consents to be obtained prior to a sale or a further investment round.
Third parties may not respond instantaneously to these requests and typically, will not have the same commercial motivation to complete the transaction as expediently as the main transactional parties. Therefore, any consent that will be required as a pre-requisite to closing should be identified and highlighted as early as possible and monitored carefully to ensure they do not cause a barrier to completion.
3. Intellectual Property Ownership
For many technology-focused and start-up companies, the core value of the business is almost entirely in the registered or unregistered intellectual property rights it owns or licences. Therefore, it is critical that you really understand who the registered owner of any intellectual property rights are in advance of a sale or investment.
Despite the obvious intention for the company itself to “own” any and all intellectual property rights, we frequently see staff members or consultants being incorrectly recorded as the registered owner of a trade mark or domain name. This is usually an administrative error from when the application was made and can be very easily rectified, however any purchaser or investor will want any errors corrected prior to completion.
You can check who the registered owner of trade marks, patents or designs are on the Intellectual Property Office website (or click here). Since GDPR, there is no public register showing the registered owner of domain names, therefore you will need to review any documentation that you received when making the application.
In order to assign any intellectual property rights, you may need to execute an assignment deed. This may be straightforward if the assignor is a current staff member, however if they have since left the company then this can create delays whilst you try and locate the individual.
4. Statutory Books
Each company in the UK must maintain up to date statutory registers and be able to produce these registers upon request at the company’s registered office (or an alternative inspection location (SAIL)). These registers are not the same as the information provided at Companies House, although there is some overlap. The statutory registers must include:
the register of shareholders;
the register of directors and secretaries;
directors’ residential addresses; and
the register of people with significant control (PSC register).
The statutory books may also include the following registers:
a register of applications and allotments;
a register of transfers; and
a register of charges.
It is essential for any purchaser or investor to have access to these registers as they constitute definitive evidence of the shareholders of the company and they will also be under an obligation to maintain the registers after completion.
Correcting, writing up or updating statutory registers often cause significant delays to any due diligence timetable and may also create an additional expense to the transaction that was not previously provided for. Therefore, it is sensible to ensure that the registers are updated, when required, in real time and kept (either in physical or electronic form) somewhere easily accessible.
We offer various company secretarial packages that will assist you in maintaining your statutory obligations. Please contact us if you would like to learn more about our company secretarial services.
5. Contract Due Diligence
Contract due diligence is required on any form of exit or investment, but there are certain clauses that have the potential to cause delays to the transaction or frustrate the process entirely. It is useful to have at least conducted an initial review before seeking a purchaser or an investor to assess any areas of potential risk.
Many contracts restrict one or both of the party’s ability to assign their respective rights to a third party without first being notified or one party granting permission prior to the event (as already mentioned at point 2 above). Whether or not a party can assign the benefits and obligations under a contract will simply rest on the wording of that specific contract. A restriction on assignment will only be relevant if you are planning to sell assets or carve-out part of the business prior to a share sale.
Some contracts will also prevent or place restrictions upon the change of control for the target company. A change of control is different to an assignment as it relates to a change of the company’s majority shareholders. Therefore, this clause will apply in a share sale or where an investor is taking a majority stake in the company. A change of control clause will usually require the company to give notice of the proposed change of its ownership to the other party and may also require the other party to provide prior written consent to the change.
Although typically, these kind of provisions are less common than rights on assignments, a change of control provision requiring the prior written consent of a third party is the most likely to disrupt a transaction timetable. That third party may potentially use their contractual right in this scenario as leverage to renegotiate the commercial terms of the relevant agreement and so the sooner these clauses have been identified the sooner a course of action can be agreed upon between all parties.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.