Friday, 30 May 2014

Co-Complimentary – a trainee on the transaction trail

Being a trainee in the Corporate and Commercial practice (CoCom) is an eye-opening experience. I don't mean in the 'aggressive optician' kind of way, but I really have found it fascinating because it's a great opportunity to understand how businesses work in a way that no other practice can show you.

In my opinion, only once you have assisted clients in the context of corporate law do you really have the opportunity as a trainee to get a bird's-eye view of everything – its services and products, structure, share capital, directors, employees, assets, contracts, suppliers, customers, turnover, tax reliefs etc. I often find it useful to draw spider diagrams so I can visualise the structure of a group of companies. At times the diagram can be very simple (probably a pyramid shape) or frustratingly complex (imagine a stick-man fighting an octopus).

I am currently assisting a partner in a transaction in which our client is selling its company. Luckily, I have been involved from the beginning and hopefully will see the deal complete before I move seats. At the outset, the supervising partner told me that by the end of the transaction I will know the business inside-out (and probably better than the sellers themselves). Finding myself in the middle of drafting a disclosure letter, I can certainly see what he means. If you are not familiar with the 'disclosure letter' then I will explain this further below. It is the main stage in a transaction's due diligence process.

Let me give you a brief run-through. The purchaser, Just Buying Limited, is buying the entire share capital of iSell2U Limited (obviously woefully fictitious names). Both parties will enter into a share purchase agreement (SPA) - the main document that governs the acquisition. At the core of the SPA will be the warranties. A warranty is a statement of fact. Numerous warranties will usually appear in a separate (and very large) schedule to the SPA. In an acquisition, the principle of caveat emptor applies (or 'buyer beware'). This means that Just Buying has no automatic protection from the law as to the nature and extent of the assets and liabilities it is acquiring.

So, in order to find out as much as it can about iSell2U, Just Buying will insert numerous warranties into the SPA to try and fish out any areas of concern. There will be warranties in relation to all sorts of aspects of iSell2U's business so that it knows exactly what it's buying. If a warranty does not accurately reflect the true position of iSell2U's business, then it is up to iSell2U's solicitors to 'disclose' against it. These disclosures are made in a disclosure letter. If a disclosure is made against a warranty which does not reflect well on iSell2U's business, then Just Buying may use that disclosure to negotiate a reduction in the purchase price. If iSell2U does not disclose against a warranty when in fact it should have, Just Buying may be able to sue for breach of warranty. This should be avoided at all costs.

Time for an example. A typical warranty could say something like "There are no contracts to which the Company is a party which has more than three months left to run and which the Company cannot terminate by three months' notice or less without payment of compensation or damages". To consider this warranty fully, and avoid the risk of breaching a warranty, I would need to review every single contract that iSell2U is a party to, and read its duration and termination provisions in order to see whether it can terminate the contract with three months' notice without any unwanted repercussions. Every single contract which is not caught by the warranty will then need to be detailed in the disclosure letter. This can take a very long time, but it is a great way to understand the company's contractual commitments.

As you can imagine, after dealing with approximately 40 pages of warranties relating to every single aspect of the business, you begin to know the company very well. It really is a great way to grasp the complexity of a business and adapt what you have learnt to other clients and even current affairs. It is tasks like these that make you realise how useful a seat in CoCom is, wherever you may want to qualify.     

Rajiv Malhotra -       

Rajiv graduated with LLB (Hons) from the University of Birmingham in 2007, before completing the Legal Practice Certificate at BPP Law School in London. After acting as a Legal Assistant with a large Watford firm, Rajiv joined B P Collins in April 2012 as a paralegal before beginning his training contract in September 2013.

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