HSF Assessment Day Research PDF

Competency Questions: Answers for: 1. Teamwork and leadership 2. Organisation and time management 3. Communication skills (dealing with difficult people/persuasion/negotiation) 4. Integrity 5. Innovation/Entrepreneurship 6. Determination/motivation 7. Dealing with set-back/failure 8. Adaptability/flexibility Mock Questions 1. What are your strengths/weaknesses? 2. What skills did you learn from your last job/work experience? 3. What attracted you to this job? 4. What attracted you to this firm? 5. What do you know about us? 6. Tell us about a time you worked in a team. 7. Tell us about yourself. 8. If asked to carry out instructions you disagreed with, what would you do? 9. Tell us about a time you solved a complex problem. 10. Tell us about your hobbies/the achievements you’re most proud of. Competency Interview (400 words each) Why Commercial Law I am interested in commercial law because the dynamic nature of the field presents new challenges and opportunities that appeal to my mindset to never settle for less. I plan to apply this in practice by always seeking better ways to improve services for clients; I find it fascinating to keep up with evolving opportunities and consider the implications for businesses and clients. The HSF First-Year Workshop enlightened my interest in disputes, navigating conflicts and crafting innovative dispute resolution strategies. My passion for advocacy, commitment to client-centric representation and the pursuit of effective resolutions deepens my drive for a career as a commercial lawyer. natural progression for me due to my extensive experiences in advocacy, client relations, and a deep- rooted passion for the legal field. As UCL’s Vocations Coordinator, I facilitate negotiation competitions, sharpening my skills in dispute resolution and client-focused strategies. The challenge and artistry of advocacy deeply resonate with me; I have reached quarterfinals in junior negotiations and excelled in teams debating competitions and this has fortified my ability to craft persuasive arguments and advocate effectively. The HSF First-Year Workshop furthered my interest in alternative dispute resolution, providing valuable insights into processes of mediation and arbitration. My passion for advocacy, commitment to client- centric representation and the pursuit of effective resolutions deepens my commitment to a caree Why HSF Why me? tell me about a news story you’ve been following recently Know why you don’t want to do other careers How you work in teams how you balance multiple deadlines - When did you work in a team and faced challenges? How did you resolve them? - How do you deal with multiple deadlines/priorities? - When did you face an unforeseen event? (links to the managing of deadlines and priorities) - What do you expect to be doing when working as a trainee? - due diligence → can be last minute red flag request with deadlines hours away or multi-week process with DD report preparation, team exercise - conditions precedent checklist → finance trainee, CP checklist, review conditions, chasing parties to ensure satisfied pre-closing - legal research → flow from client query or technical issue in transaction, case law, statutes, EU law, guidelines and technical notes, can be one line response or research memo - Drafting board/shareholder minutes → almost all company transactions start with meeting held by company’s board/shareholders to consider and authorise relevant actions - Liaising with local counsel → engage lawyers in other jurisdictions to draft documents and opine on domestic law, updates, review documents, giving greenlight for execution - Draft court submission → citing legal arguments, written advocacy, writing to persuade, get to grips with facts, - Proofread - Prepare trial bundles - Company house filings →3pm same day filing service at Companies House - Negotiate NDA → get direct exposure to clients and practice negotiation What other law firms have you applied to? What makes you happy? How you negatively impacted someone What are the biggest issues facing the firm/legal industry today? How might external news affect clients Access to capital and finances - how might a news event affect a client’s ability to access more/less of their finances? How does this affect their willingness to spend big? Willingness to take risk - does the news event signal an uptake/decrease in a client’s willingness to take risk? How about their specific industry, or the global markets, as a whole? Industry-specific goals - has this news event signalled a revolutionary overhaul or minor, specific amendment to the client’s industry? Are they well equipped to deal with it? Currency ramifications - how might a news event affect exchange rates worldwide? For clients that are reliant in trading, importing and/or exporting in that currency, have they lost or gained purchasing power as a result of this? Liquidity - how might a news event affect how quickly a client can exchange its assets for cash? Might that event put pressure on them to do just that? Regulatory obstacles - how might a news event signal a coming change in regulation or law? Is the client prepared for this change? Will it require significant overhaul? Retaining high-quality staff - how might a news event affect the supply of highly-trained staff or graduates? Might it change what the client is looking for from them in future? Will other aspects, like visas or tax implications, be affected? The supply chain - how might a news event affect a client’s suppliers’ business? Technological advantage - might a news event signal a need for technological evolution in a client’s business model? How will it integrate practically, as well as in other areas such as training, regulation and running costs? Threat to company values - will a news event threaten a client’s specific company values? Confidence of investors - will a news event shake the confidence of a client’s investors? Analysis tools to see from client’s POV Prepare to be challenged SWOT → strengths, weaknesses, opportunities and threats - Consider USP, weak links, chances for development and outside threats PESTLE 01. Identify key clients of the firms, and the sectors they operate in 02. Pick a couple of these sectors - ones that interest you 03. Research key issues in these sectors (see the Appendix) 04. What effects are these issues having in each sector? 05. How are these effects impacting clients' operations? 06. How might law firms need to advise, as a result? How are lawyers charged? - Hourly basis (rack rate or discounted rate) - Or more commonly, fixed fee/fee cap with client\ - writing off time common (cancelling time on the matter file which cannot be billed to the client as advice does not incur less costs, clients want more for less) - However, clients are increasingly demanding fixed fees or an upper limit to what can be charged by firms for the work that they do, which puts pressure on firms’ profitability. - Financial metrics used by law firms 1. utilization This is essentially a measure of a fee earner's busyness (so you want this number to be high!). It's calculated by looking at the percentage of a fee earner's total time that is actually billable to clients. - percent of that attorney's time was spent on work that is billable to clients. 2. Realization This is a profitability measure. It's the percentage of time recorded to a matter that is actually paid. So, it takes into account things like discounts agreed & write offs of time. It's uncommon for a matter to have 100% realization 3. Leverage This refers to the ratio of partner hours to associate hours recorded to a matter. This is another key indicator of profitability, as partners have higher fees, so the more associate time to a file (i.e. the more 'leveraged'), the better 4. Work in Progress This refers to 'work in progress', which is time recorded but not yet billed. Law firms bill or write off all their WIP. One key way in which juniors can add value is to keep an eye on the WIP on the file and inform the associate if it is nearing any agreed fixed fee/fee caps. WIP fees are a measure of those fees that have been captured by lawyers but not yet invoiced by billing staff. Law firms should strive to invoice all of their outstanding WIP fees on a monthly basis, and any WIP fees should not remain outstanding for more than 30 days Clients - Multinational corporations - Banks - Insurance companies - Governments warranties/indemnities/conditions precedent and knowing how the end result of each differs hence each of them is more suitable in different situations Overview of the Merger Process 1. Sign exclusivity and confidentiality agreements (draft emergency press statement in case of leaked information) 2. Negotiate heads of terms (all fundamental points should be broached, tax, regulation all addressed) 3. Due diligence (each party reviews info about the other, finances and risk profile, respect regulatory obligations, start discussions with key stakeholders like banks) 4. Documentation → merger is a misnomer, usually achieved by one firm transferring business as a going concern to another 5. Partner Vote 6. Signature and completion (logistical, engaging with clients, staff, arrangements) 7. Completion and effective date 8. Integration Merger agreement → usually a business transfer agreement, assets and liabilities transferred as a going concern to the other, issues identified or due diligence excluded from transfer. - Includes representations and warranties to manage risks with assumption of assets and liabilities Look at solicitors code of conduct Recent deals HSF Annual Report, objectives, ambition 2025, Failures of Firm e.g. Thomas Cook - Little in terms of tangible assets, so when customers leave for competitors, value of firm plummets, weak trading - Too much debt, pension deficit,insufficient fundraising from shareholders, weak sterling, - Heatwave, delayed bookings because of Brexit - Restructuring attempt too little too late, writing down the value of My Travel - Recapitalisation funded by major shareholder failed, due to banks demand for £200 million - Gov refused bail out, sets dangerous precedent, moral hazard, - High street brand → decline of high street and they didn’t enter into CVA with landlords - Why liquidation not administration o liquidation brings the end of a company by selling its assets before dissolving the company entirely. Administration is utilized when there is a chance of rescuing a business that is experiencing high levels of financial stress. ▪ Voluntary administration also puts a moratorium on creditors' claims, which gives the company time to negotiate with them. ▪ A moratorium is a temporary suspension of an activity or law until future consideration warrants lifting the suspension, such as if and when the issues that led to moratorium have been resolved.. - The company structure was too complex (i.e. so many different parts – flights, tours, hotels etc.) and their debt was too high (£1.7bn) for any administrator to be able to take over. An administrator would not have had the funds to sustain TC’s debt whilst looking for a purchaser Legal implications? Did Directors act appropriately/in good faith - duties of a Company Director as is set out in UK company law e.g. the fact that Directors have an obligation to Promote the Success of the Company, exercise reasonable skill, care and diligence, exercise independent judgement and act within their powers. Wider implications - Banks such as Barclays, Morgan Stanley and Credit Suisse are facing write downs of over £1.8bn due to the collapse – this might be because they had loaned TC money and now can’t claim it back, or they were shareholders, or they were advising TC and now won’t be paid for the advice they provided - ^Write down also due to the fact that of the £1.9 bn debt that TC had, the lenders are anticipated to only be able to recover approximately £138m of this back. That is a huge deficit and also will not get the interest payments that they had been anticipating. - Loss of jobs globally - Brits stranded abroad – causing the largest peacetime repatriation in UK history at a cost of £500m to the UK government and travel industry’s insurance scheme Potential things to take into account with purchase of Thomas Cook by Hayes Travel? - IP issues such as should Hayes Travel re-brand the acquired stores as Hayes Travel or try keep the Thomas Cook name? How would they need to go about getting copyright permissions if they wanted to use Thomas Cook? Would this even be a good idea given the ‘bad faith’ that is now associated with the Thomas Cook brand by many members of the public globally. - What type of purchase is this? Why has it been used? It is an asset purchase (rather than a share purchase) as Hayes Travel have cherry picked the assets of Thomas Cook that they wish to acquire (i.e. the shops, leases for the shops, some employment contracts). This has been used as it means Hayes Travel do not have to take on all the liabilities that come with the Thomas Cook brand that would be the case if they had used a share purchase. - Any properties that are leased – have they bought the right to those leases? Can they do this? Have they checked if the lease agreements have change of control or break clauses? Might end up having the leases terminated or having to renegotiate the rent. CVA → agreements between companies and their unsecured creditors which allow for the agreement of new terms such as extending repayment times or writing off some of the money due (a haircut) CVAs are good as they can be quickly developed and target specific liabilities – they are also a cheaper form of restructuring than more expensive and formal insolvency procedures. They prevent one creditor holding out and stopping the whole proceedings as they only require agreement of 75% of creditors by value. BUT they are seen as controversial as they are often used to force landlords into rent reductions, they create uncertainty in the property market and they are often criticised by landlords for their lack of transparency. How can a law firm help? - Advising on the restructuring before the liquidation, - advising creditors of the rights - helping Hayes Travel with their acquisition – various departments e.g. banking, M&A, employment etc. - public policy team helping the government with their inquiry into whether the TC executives acted appropriately. Difference between corporate team and banking & finance Corporate - advise clients on public and private M&A, JV, restructurings Banking & Finance - represent commercial banks, investment banks, lenders, financial institutions as agents, lenders, corporate borrowers, PE. - Advise on raising capital for transactions (acquisition/leveraged finance), general corporate lending (for day to day running of business), project finance (building power station), asset finance, restructuring and insolvency (reschedule company’s debt if struggling to pay bank or handle creditors for bankruptcy cases - What is Project Finance? o long term financing of infrastructure and industrial projects, different from regular financing as based on future cash flows of project rather than sponsors’ finances, o lenders → provide the debt portion of financing, usually goupd of lenders form a syndicate → include Development Finance Institutions (DFIs) like state banks and commercial lenders o sposors → parties carrying out project to satisfy objective, ultimate equity beneficiaries of project, aim to own completed, fully operational and debt-free project that maximises returns o usually host government has a stake in project, need consent if involving extracting natural resources ▪ Upstream → initial search for products and extraction and production in oil and gas industry ▪ Midstream → how products are transported once extracted, often applied to pipeline transportation of crude oil and natural gas ▪ Downstream → refinement, processing and marketing of products to be used for energy in oil and gas o Special purpose vehicle (SPC) Project Company → shell company limited company through which project is carried out, developers/sponsors invest equity into SPV, have right to carry out project and operate assets for set period under terms of concession o Limited Recourse Financing → as project company is SPC< limited recourse to lender should there be problem with project o Public Private Partnership -> gov and private sector, (Private Finance Initiatives) to joint ventures, outsourcing, sale of equity stakes in state-owned businesses Capital Markets - Deal with debt (issuing bonds) and equity (listing shares of company on stock exchange - Debt capital markets deal with bonds, usually issued to public, common way of raising money easily tradeable among investors, high demand - Equity capital market lawyers involved in IPO< draft, check prospectus, regulatory compliance Dispute Resolution - Traditionally litigation, ADR more popular - Arbitration → parties appoint independent arbitrator impartial experts, mediation, nominate neutral 3rd party reaching mutually beneficial agreement Tax - Tax disputes - Best way to structure assets, advise clients on implications of tax during transactions especially when restructuring financial and administrative frameworks in different markets - Saving clients money to find tax-efficient transaction structures - Help comply with HMRC regulations - Work with accountants like the Big 4 (Deloitte, EY, KPMG, PwC) Real Estate - Property matters, mostly business premises - Raise capital to finance transaction - Help with due diligence of M&A deals - Instruct lawyers to help determine rights and contractual lease agreement which the seller currently holds Intellectual Property - Help secure and protect clients’ IP rights for ownership of ideas, inventions, products or concepts, through trademarks, patent, copyright, design and trade secrets - Provide legal advise on usage, marketing and distribution mechanisms of products/ideas which are considered IP, may help clients register/apply for IP rights or work on licencing IP rights to third parties - Also issue notices to parties who infringe on client’s rights, if dispute regarding origins of IP asset arises, will examine data in patent registries or search through trademark and registered designs databases to establish IP ownership - If Ip dispute, issue court proceedings and prepare case for trial - Ensure IP rights properly transferred in transactions, oversee transfer Competition - Whether proposed merger or asset buying would be investigated by UK’s Competition and Markets Authority (CMA) or European Commission.. - Usually if merger/asset bought allows company to own 25% or more of market share, legally considered monopoly, would dominate market too much, transaction likely rejected - Also Foreign Investment rules, UK foreign investment review regime under National Security and Investment Act (NSI) requires businesses and investors to submit mandatory notifications for certain acquisitions of and investments in companies active in 17 key sectors. Employment - Provide advice on workplace related legislation and help with issues relating to employees’ transactional work - Drafting and negotiating employment contracts, devising benefits and remuneration strategies (e.g. selling shares to key employees) and dealing with redundancies - In charge or conducting due diligence on pension scheme and overseeing transfer of pension liabilities and migration of salary packages, If multiple jurisdictions involved, employment lawyers will liaise with local counsel and comply with local labour laws Arbitration is a form of alternative dispute resolution where an impartial arbitrator makes a final and binding decision to settle a dispute between the parties. Arbitration is utilised as an alternative to litigation as means of resolving disputes without involving the courts. - highly technical, arbitrators with an appropriate degree of expertise can be appointed - cheaper, more flexible, faster, awards easier to enforce in other countries than judgements, confidential, - leaglly binding and enforceable Mediation makes use of a neutral third party to find an agreement between parties, utilising their expertise. The mediator importantly does not form a decision on the case, they are there simply to facilitate an agreement. However, that is not to say that a mediator will not look at the facts of a case as they may be called to evaluate the strengths and weaknesses of a particular matter. - Faster, cost saving, confidential, maintain relationships, required by courts to attempt ADR, non- binding no disclosure - Negotiate settlement assisted by 3rd party, voluntary, not legally binding by de facto Bond? - Used in debt capital markets, financial instrument sold to investors in exchange for money Confidentiality/NDA? - Legally enforceable contract prohibiting unauthorised sharing or sensitive information and establishes “confidential relationship” between parties Conditions Precedent - Conditions which must be fulfilled before obligations in contract becomes binding Disclosure 1. In transactions → exchange of info between parties with aim of encouraging parties to have better understanding about specific company/business 2. In litigation → legal obligation requiring parties to exchange documents relevant to case/investigation Force Majeure Clause - Clauses which pre-empt risk and liabilities that may arise if unforeseen events occur such as strikes, pandemics, natural disasters Guarantee - Legal promise made by guarantor to repay financial obligations owed if borrower defaults Indemnities - Contractual promises made to pay compensation to other party if specific scenario occurs - E.g. clause to pay compensation for any loss suffered if a third party files a claim IPO - Privately owned company offers its shares to the public, done by listing shares on stock exchange Liabilities - Amount of money of economic value owed to another party Loan agreement - Contract between lender and borrower stipulating t+c of loan MNCs - Company which has business operations in at least 2+ countries - Some definitions also require them to earn at least 25% of revenue from business operations abroad Non-compete - In employment contracts preventing former employee from working in rival business/establishing competing business Offshoring - Relocation of operations to country, e.g. Sansung offshored manufactory to USA and India SME - Less than 250 employees, annual turnover less than 50 million Euros SPA - Buyer agrees to purchase from seller’s company, written document with t+c Warranties? - Contractual promises made by seller, if broken, promises can lead to claim for damages or compensation Know big trends 1. Has shaped the wider commercial sector 2. How it has/potentially could impact the legal sector 3. How CC could be involved in this e.g. if it is new legislation, advising clients on this, if a company needs restructuring CC could bid for the work etc. Pick news article PESTLE - Big 4 firm fined for auditing - Is someone providing an impartial view or not, attention to detail! Case Study Knowledge Needed 1. M&A Transaction a. Look at SPA, common clauses, how are warranties and indemnities drafted? MAC clause, entire agreement clauses, Practical Law templates, Investopedia defiinitions e.g. contract between bank and 3rd party outsourcing company → find clause relating to this, will ask advantages of outsourcing? +/- and alternatives? 2. IPO 3. Lease or contract Example Commercial Scenario: KK want 100% ownership o Key issues here are that Alice is potentially developing of dementia and Daniel is adamant that he does not want to sell his stake KK don’t want to find new supply lines for JJ products and want to maintain their existing suppliers for the time being o There are various issues with the JJ/FruitsRUs contract which could pose challenges here KK ideally don’t want to spend any more than £850mn o JJ was recently valued at £1bn so there is a clear mismatch here. We may need to look at leveraging different issues to lower the purchase price and also look at nuanced payment models such as instalments or targets-based payment KK want Jacob to stay within the company in a prominent public-facing role o Jacob wants to leave to start a new venture; we would need to try and negotiate him staying for a longer period and also need to ensure his new venture would not compete with JJ/ KK. We would look to have a non-compete clause in the contract to secure this. Do an executive summary Creative Solutions Political, Economic, Sociological, Technological, Legal and Environmental Analysis targets-based payment is a flexible payment/ consideration strategy whereby existing senior managers are incentivised to stay on for a prolonged period of time by being paid more if the company hits certain performance targets. It can be a way of ensuring that senior managers who would otherwise want to leave are likely to stay on, and also spreads the cost for the buyer over an additional couple of years. It's one of many nuanced payment structures that can be used nowadays. Political - Government/political stability - Corruption - Tax policy - Labour laws - Trade restrictions Economic - Economic growth - Exchange rate/interest rate - Inflation rates - Disposable income/unemployment rate Sociological - Population growth rate - Age distribution - Career attitude/health consciousness - Lifestyle attitudes, cultural barriers Technological - Automation and innovation - R&D activity, tech change and awareness Legal - Discrimination laws - Antitrust laws, employment laws - Consumer protection laws - Copyright and patent laws - Health and safety laws Environmental - Weather/climate - Environmental policies - Climate change - Pressures from NGOs Impact of ESG in different industries - Financial Sector → influence investment decisions, when investing, lending, underwriting, focus on risk management, climate change, poor governance, social unrest, avoid harmful investments, focus on sustainable business models - Energy Sector → significant contributor to global carbon emissions, Environment crucial, companies expected to have strategies for transitioning to renewable energy sources, reducing emissions and managing waste. Social factors include labour rights and safety, while Governance covers aspects like regulatory compliance and transparency - Tech Industry → energy efficiency, managing electronic waste, social issues, workforce diversity, data privacy, digital divide. Governance concerns are data protection, ethical use of AI and antitrust regulations - Healthcare sector → product quality and safety, access to care, pricing practices, managing medical waste, reducing carbon footprint. Good governance practices essential for managing regulatory risks - Food and Beverage Industry → sustainable sourcing, animal welfare, labour practices, nutrition and health, reducing water use, waste, emissions, governance issues → safety, marketing practices, regulatory compliance. - Construction Industry → sustainable design, energy efficiency, waste reduction, social factors → safety, labor rights, and community impact. Governance → business ethics, corruption, regulatory compliance - Tourism → protecting biodiversity, managing waste, social → preserving cultural heritage, community relations, Governance → business ethics and regulatory compliance Question: where to open next office? - HSF should increase their presence in emerging markets across continent of Africa, particularly sub-Saharan Africa. While various international law firms have maintained their presence in such regions by partnering with local law firms, might prove insufficient business model. Should consider opening office in Johannesburg SA, recently witnessed a surge in foreign direct investment flows, especially sectors like local equity, bond markets, infrastructure, commodities projects and manufacturing plants. Thus, Johannesburg can be categorised as a key hub for development in the region. SA also history of progressive legislation and economic policy supported by independent judiciary. Country benefits from less political and economic turbulence than neighbouring countries, high literacy rate, one of the most literate countries in Africa. Legal complexity derived from deals in SA justifies opening office in Johannesburg. Private equity firms like KKR, Blackstone, Carlyle have been particularly active in that region, Blackstone invested in Kosmos, one of the most successful oil companies in Africa. Alternatively, can consider other regions of Africa like Nairobi in Kenya or Lagos Nigeria. Both regions seen tremendous economic growth in past decade and home to some of the largest fintech companies on continent. Kenya’s M-Pesa and Nigeria’s Moneywave… Companies are making a similar calculus. In May 2022, fed up with the Eskom-imposed electricity rationing that forced the company to curtail its power use by as much as 20%, gold mining company Pan African Resources Plc decided to transition to solar. while Standard Bank loaned $32 million in the first eight months of this year through its “solar-for- home” program, enabling around 450 homes to set up installations. What is a change of control clause? - Provision in an agreement giving a party certain rights (e.g. consent, payment or termination) in connection with a change in ownership or management of the other party to the agreement. Can be triggered by a sale of more than 50% of a party’s stock. o E.g. Customer shall have the right, without prejudice to its other rights/remedies to terminate this Agreement by 3 months’ written notice to the Supplier, if there is a Change of Control of the Supplier. Notice of termination under this clause must be given within 3 calendar months of notice in writing that such events have or will take place. - Important → change of control can be triggered by sale of all or substantial portion of target company’s assets, any merger of target company with another company, the transfer of certain percentage of target company’s issued and outstanding shares from the target company to the acquirer, therefore in M&A transaction vital to consider - If multiple individual contracts with third parties (e.g. external suppliers or sponsorship contracts need to employ certain contractual instruments to bypass change of control provisions - Active loan agreement → change of control will enable bank to declare event of default, cancels any obligation to make further loans - If banking, applicants should consider change of control regime under Part 12 of Financial Services and Markets Act 2000. Applies to all UK-incorporated financial, banking, insurance and investment sector. - Any company making disposals in financial services sector, need to obtain relevant approval, may delay or derail a transaction completely if consent for change in ownership is withheld When presenting findings - Today, I’m going to present my findings on why I’d recommend [target] for acquisition over competitor. I’ve structured my thinking into three categories, X, Y, Z What legal departments would be engaged in transaction? - Full-service firm, general corporate, finance, employment, IP Warranties v Indemnities v Representations? That is a great question, do you mind giving me some time to think about it? Debt v Equity Finance 3 contract essentials - Offer and acceptance (words or conduct), not ITT, - Consideration - Intention to create legal relations Express terms set out in agreement, Implied terms objective, terms of contract read against factual matrix (body of facts reasonable available to both parties when entering into contract The "parol evidence" rule provides that evidence cannot be admitted to add to, vary or contradict a written document. Therefore, where a contract has been put in writing, there is a presumption that the writing was intended to include all the terms of the contract, and neither party can rely on extrinsic evidence of terms alleged to have been agreed which are not contained in the document. This presumption is rebuttable, and extrinsic evidence is admissible, if the written document was not intended to set out all the terms on which the parties had agreed. The parol evidence rule prevents a party from relying on extrinsic evidence only about the contents of a contract (and only express terms), and not about its validity (such as the presence or absence of consideration or contractual intention, or where a contract is invalid for a reason such as incapacity). Implied terms - In fact → not expressly set out in contract parties have intended to include (officious bystander test and business efficacy test) - By statute → terms imported by operation of law - By custom/usage End of contract 1. Expiration → fixer expiry date or right to terminate in contract (breach) 2. Termination-> a. Breach from failure or refusal to perform, defective performance or incapacitating oneself (Sells to third party) b. Anticipatory breach → before performance due, party repudiates contract or disables from perfroming c. Termination for breach 3. Vitiation a. Misrepresentation (fraudulent, negligent or innocent) i. Once proved , remedies are rescission, indemnity (order payment of expenses incurred), damages b. Mistake (common, unilateral, mutual) 4. Frustration (unforeseen event occurs making performance impossible, illegal or essentially different from what was contemplated 5. Damages/remedies o Also equitable remedies like specific performance, injunction (interlocutory designed to regulate position of parties pending full hearing Questions - Partner o I’ve been reading about [issue] and I was wondering the impact you think it has on [firm/firm’s practice area/firm’s client]? - Trainee/Junior Associate o I’m really interested in [department]. Have you sat there?” “What stands out to me about the firm is [characteristic]. Has that been your experience?” “How would you describe the firm’s overall atmosphere? How can business raise capital 1. IPO 2. Loans Share purchase and asset purchase? Trading vs Investing - Trading short term, liquid, can accesss money sooner - Investing long term illiquid, locking money for longer period of time Private equity? Angel Investor? Venture Capital? PE: 1. Source of Financing (alternative to IPO or bank loan) 2. Investment by PE Investors in Company not listed in SE (e.g. venture capitalist companies or institutional investors like hedge funds (shorter term, a couple months, time horizon of investment activity is shorter) and pension funds etc.) a. Look for company underperforming or with large growth potential b. Invest in that company or buy it, help it to grow and sell after. Several years - When company want to use PE investments, will issue new shares to be bought by PE investors o Not just a financier but also a shareholder of the company, can enter into management of company o A marriage with an end, relationship will not last forever, can only profit from selling and getting capital gains o Why use PE Investment ▪ 1. PE Investors invest in you, your company is high quality ▪ 2. Networking benefit, access to new customers, suppliers ▪ 3. Knowledge benefit, investor part of management, lead company, manage team, R+D, ▪ 4. Increase amount of equity and investor standings - - Subcategories 1. Venture capital a. start ups and tech companies with high growth potential, more risky, invest 50% or less of equity in company, spread out risk and invest in different companies 2. Private equity a. Usually buys more mature companies, less risky, mostly buy 100% ownership of company or at least majority 3. Angel investors a. High net worth individuals investing in company at early stage Exit Strategies for PE investors 1. Trade sale (to 3rd party purchaser operating in same industry 2. IPO → generates the highest possible return, long process and sometimes unpredictable PE Non public pieces of companies, high networth individuals, insurance companies, large financial institutions, pension funds, PE investing in sizeable companies, not start ups but investing capital can be useful, implement strategies to allow company to perform better and to be sold to bigger company Take cut - 2% management fee annually - 20% carried interest, profits fo to PE firm Hedge Funds Financial institutions trading in markets, investing in currencies, commodities across financial markets, mostly public equities like apple coca cola, not investing over long term, getting money from investors into different parts of market. Specialised could be global macro strategy, equity hedge fund focusing on publicly traded equities. Trader investing to mae quick profit, PE less like day trader and long term - Protect money and pool of money – hedge fund - Make money by charging. Fee on money they manage and take cut of profits received from successful trades - More niche asset classes, more risk and access to more restricted investment opportunities - More risk and leverage, higher fees and more expensive for clients than asset managers - Shorting companies, go up and down (short selling) - More illiquid, locked up for longer amount of time Venture Capital - Not investing in large established companies, venture means start ups entrepreneurial early stage pursuits, and money - 250k-500k dollars, PE 100 million to over 1 billion, scale is different Asset Management? - Make investment decisions on portfolios or securities on behalf of clients under investment objectives and parameters clients define (clients can be institutions, pension funds, sovereign wealth funds, insurance companies and high networth if in private banking/wealth management) - Risk appetite, investment time period, areas they want to stay away from, - Asset manager, broad range of investment ideas and networks - Mutual funds focus on traditional asset classes, access to money is liquid - Manage risks, diversify portfolios, mitigate risks, - 5-10 years, long term relationships IB - Start up or scale up, come to banker advising Fortune 500, governments, - Clients differ as clients look for different things - If looking to grow, don’t look for asset manager - Interested in acquiring competitors, e.g. raising capital - Manage risks, make sure able to purchase and sell don’t underwrite or hold securities and one of two sides bails can’t sell or sell at discount. - Deal by deal basis What is a leveraged buyout? - Leverage (borrowed money, investing or increasing size of investment using borrowed money, debt, confident in investment, increase potential returns, 1k vs 100k) - Buyout (companies buys out an existing company, investing so much you acquire them) Primary Market and Secondary Market? - Securities or financial instruments created o PE firms initially invest in different c=private companies, - Secondaries are where buyers and sellers are Investment 1. Debt (don’t need to give up shares or company to acquire debt, need to pay interest) 2. Mezzanine Financing (combination) (benefits from pros of debt and equity, if someone uses mezzanine, can change debt to equity if company is going to default) 3. Equity (sell a piece of company to raise money, lose a part of company, but don’t need to make interest payments) Legal Billable House - Lawyer records how they spend every minute to calculate how to bill clients - Target billable hours, but this system challenged, increasing fee pressure, fee conscious, care about result not time spent on transaction. - Alternative fee arrangements →barriers are unpredictable and legal tech facilities abolishing the billing system - Predicting legal efforts in resolving matter, allows firms to provide more price certainty to clients - Luminance → doc review task taking paralegals 10 hours to complete takes 10 minutes on platform, know how much time is needed for task, charge clients for the value of task rather than time spent on it - AFA → fixed fees, cap fees, success fees and value based billing more common Legal Tech Diamond shaped law firm - Routine work done by junior associates and trainees, paralegals, more efficiently done by AI - Pyramid shaped to diamond shaped, fewer trainees, more associates and specialists being able to handle the IT and machine systems - Legal incubators → A&O → develop own delivery capabilities to solve legal problems - Talent acquisition and training process, Limited Partners - E.g. PE Firm like Blackstone raises 1 billion to invest in tech, limited partners contribute money to fund, Blackstone is fund, contribute capital, liability is limited, lose as much as they invest General Partners - Responsible for day to day investment - Blackstone - Contribute some money so incentives aligned Disputes (includes litigation, arbitration and mediation, suing others on behalf of clients, defending client if they are being sued or advising clients in situations where potential legal dispute, more academic than transactional lawyers, nature of work how to best argue case, legal principles, precedents and applying to client’s situations, doc review for discovery, disclose relevant documents, adversarial, arguing) - Longer timelines as disputes especially going to court/arbitration can run for years if don’t settle - Easier to predict busier periods - Drawn out nature, regular deadlines, not many quiet days - Pace is a slow burn - Not arguing about points of law, but mostly procedural matters e.g. party wants more time to file document and other party doesn’t agree, or one party didn’t fully disclosure, so other party seeking full disclosure Transactional (non-contentious, drafting contracts, negotiating commercial arrangements, how best to carry out transaction, more commercial in nature, make sure clients commercial intentions are accurately reflected in contract, sometimes asked to issue legal opinions, doc review in due diligence. Less adversarial but not completely review, some level of cooperation and each party is trying to get best deal. - Schedules change based on nature of active deals - Several deals moving or paused and moving slowly different - Last minute things, tight timelines, - Closing a deal is up to client, reflect in documents, Questions for Partners? - Why did you move to this firm after training - If you trained here, what did you like about this firm Anatomy of a Deal - Contracts are nuts and bolts holding business together, without it business doesn’t work - Deals, sell, cooperate, separation, value price, ownership etc. - Where money comes from o Leveraged acquisition (if acquirer does not have money lying around, plans to buy by investing part in shares or other equity raised by investors and borrowing from banks → debt finance, higher revenues from business to make money after selling) - Acquisition vehicle →separate new company to own and run new company post-acquisition o Lawyers determine kind of company (limited company, limited partnership, where to be registered to be tax efficient and enable business growth and access revenues to pay interest on debt) o Differences in how payments to acquisition vehicle are taxed in different jurisdictions, specialists in tax law needed, difference between jurisdictions in terms of releasing cash from target group to pay debt and interest ▪ Germany more restrictive laws in terms of extent to which companies can do this compared to UK ▪ International expertise in banking law required ▪ Ltd company registered in Luxembourg for acquisition vehicle Must happen fast before target bought for auction sale and lose out Make sure banks like it or lending won’t happen ▪ What does it own? Liabilities? Contracts? Lawsuits? Due diligence, do they own IP, brands,which suppliers have provisions in contracts to pull out? Or reprice in event of acquisition? People involved? If one company buys them, also buy people, employment and benefit lawyers get to work understanding and migrating payment packages, look at labour laws in all jurisdictions, ▪ PE funds restructure to make more efficient, any employment issues? Unions resistance ▪ Anti-trust aspect? What other business is the target involved in? will the sale trigger an investigation by EU competition authorities? Will they be required to divest assets to level playing field? Which ones? Worth it? ▪ Execution → SPA → current owners agree to sell to PE, negotiate, redraft, price adjustments, SPA contains provisions for further adjustments on basis of value of assets, level of cash or= debt, etc. ▪ Also work in making sue all right documents in right place to be signed Share certificates Licences Employment contracts Loan agreements Bank conditions for lending ▪ Big day, signing, negotiations, last minute amendments Mergers & Acquisitions Share purchase and asset purchase difference? Protections lawyers put in contracts to mitigate risks – warranties and indemnities M&A →sheer scale of deals generates lots of fees for legal work, good to test interest in space, driving factor, will sit in practice area where I will touch this work. Replaced Example of conditions precedent? - Condition that the bank must give its consent before a transaction can be completed Reason for company to buy another - Acquierer believes company is undervalued - Go from private to public without needing to complete an IPO - Acquire company’s material contracts Finance an acquisition - IPO - Issue a bond - Borrowing from bank - Issuing shares to existing investors Company X wants to buy a particular business owned by Company Y. However it does not want to take on the company's liabilities. What acquisition structure would you suggest? - Asset purchase Warranty - Statement of fact made by the seller about target company Leveraged buyout - Use high proportion of debt compared to equity when acquiring a company Merger - 2 or more companies combine into separate entity - Combining names etc. Horizontal → competitors, Facebook brought Instagram, seems most anticompetitive, antitrust regulators investigate, want to raise competition issues, same industries same stage of production Vertical → firms in same industry, different stage of production, supply chain process for every product from raw materials to consumers Microsoft and Activision Blizzard → Microsoft makes console, platform and Xbox, Activision produces content the games, more control of platform and games produced, could lead to competition issues and it did. Would Microsoft games only available on platform, consumers have less choice, competitors cannot provide games on platform Conglomerate Merger → unrelated businesses merge together, Amazon buys Whole Foods e.g.Amazon has brand and consumer data, synergies. Acquisition - Buy smaller company’s shares or assets - A continues in existing form - Sounds better to frame as a merger, sounds more collaborative Microsoft and Activision Blizzard acquisition, phased as a merger, used interchangeably Why do companies merge or acquire? - Inorganic growth – slow, expensive, unsure if you have capacities and skillsets, - Acquire capabilities faster, active faster growth, competitive advantage - However, downside that many M&A deals destroy shareholder value, don’t realise synergies or increase in value hoping for, difference between intention and challenges. - Better off buying or building it - Consolidate assets, consolidate budgets, bulk buying, integrating into supply chain (extra profit margin results in significant cost savings, big upfront cost but overtime reduces the overall costs of the end product) - Expert local knowledge of target market - Understanding local product preferences - Access to local distribution networks - Existing brand awareness and consumer loyalty - Expansion of product/services range - Reduce competition, geographical expansion, complementary resources (factories not working at full capacity, broader product offering in smaller number of factories Synergies - IP, Acquihires, diversification, market share, buying as an investment - In M&A, 2 + 2 = 5 → increase in value of a combined company value of combined company is more than the sum of its individual parts - Synergies gained, 2 types o REVENUE SYNERGY → make more money by combining companies than individual company, strong distribution network, cross-selling services, cross-pollination ▪ 1. New distribution channels ▪ 2. New products ▪ 3. New technology ▪ 4. New market o COST SYNERGY → ▪ 1. Reduce staff/departments ▪ 2. Cut overlapping staff ▪ 3. Economies of scale ▪ 4. Singular system o Combining, don’t need 2 sets of HR or 2 IT systems, don’t duplicate resources, better negotiating power with suppliers, better terms for borrowing, collateral Other reasons for mergers and acquisitions 1. Acquihires a. For the expertise of employees, success of company is largely down to the people’s expertise who run it, hard to convince person to come to company maybe shares unlock after certain period of time (Vesting), like culture/benefits, more cost-effective to buy company b. Tech space, want talent and expertise don’t want them to work for other companies c. Investment opportunities, 2. Intellectual property a. Rights over know how and inventions b. Trademarks, copyrights and patents, better to buy company to benefit from expertise 3. Financial sponsors a. PE of Hedge funds take money for investors What is a merger? A merger is where two or more companies combine to form a new company. The existing companies typically cease to exist and instead form a new company. What is an acquisition? An acquisition is where one company buys another company. (If we’re being more specific, we would say it’s where one company takes a controlling interest in another company, which typically means a 50% ownership stake.) What is the difference between the two? Name two reasons. 1. In a merger, the companies involved are usually a similar size. Whereas in an acquisition, it is usually one company buying a smaller company. 2. If the companies involved cease to exist and a new company is created, we usually call that a merger. In an acquisition, the target company will typically either continue in its existing form or it will be integrated into the buying company. A merger typically occurs when one company purchases another company by buying a certain amount of its stock in exchange for its own stock. An acquisition is slightly different and often does not involve a change in management. In theory, a merger of equals is where two companies convert their respective stocks to those of the new, combined company. However, in practice, two companies will generally make an agreement for one company to buy the other company's common stock from the shareholders in exchange for its own common stock. In some rarer cases, cash or some other form of payment is used to facilitate the transaction of equity. Usually, the most common arrangements are stock-for-stock. Typically, the share price of the company being bought will increase as goodwill is taken into consideration in the purchase price. Shareholders are able to vote on whether a merger should take place or not. What is a joint venture? A joint venture is where two or more companies cooperate and agree to share profits and losses for a particular project.The companies will usually share ownership in a joint venture company for a temporary period. What do we mean by 'synergy'? Synergy is often cited as a reason for an M&A deal. It refers to the fact that a combined company can lead to more revenue and cost savings. This makes a combined company worth more than the sum of the two individual companies. Name three reasons why a company would acquire another company. 1. Remove the competition - E.g., Didi Chuxing, China’s ride-sharing giant took on Uber in China (or rather, Uber tried to take on Didi Chuxing). After aggressive price cuts, the battle ended on 1 August 2016 when Didi Chuxing acquired Uber. 2.Speed to marke - E.g., Amazon’s purchase of Whole Foods gave the tech giant a physical presence in prime locations. According to the WSJ’s financial editor: “Amazon did not just buy Whole Foods grocery stores. It bought 431 upper-income, prime-location distribution nodes for everything it does”. 3.Tax purposes - E.g., The desire to reduce corporation tax levels were a driver behind a several notable M&A deals over the past decade. These controversial ‘tax inversions’ were heavily criticised by Donald Trump and targeted under his Tax Cuts and Jobs Act of 2017. Name three challenges of completing a successful M&A deal? 1. Integration a. E.g., For example, when AOL acquired Time Warner in 2001, its aggressive culture clashed with Time Warner’s conservative management style. This was overlooked during the due diligence process and it led to the companies failing to realise synergies. 2. Staff retention a. E.g.,The turning point KWM Europe allegedly began when the bulk of the Parisprivate equity group defected to another firm. (In fact, this led to KWM filing a lawsuit against one of the partners and his new firm.) 3. Market events a. E.g., Royal Bank of Scotland’s disastrous decision to acquire ABN AMRO, a Dutch bank heavily involved in the structuring of toxic assets before the financial crisis led to the biggest loss in UK corporate history. All about phrasing Unfriendly or hostile takeover deals, in which target companies do not wish to be purchased, are always regarded as acquisitions. A deal can be classified as a merger or an acquisition based on whether the acquisition is friendly or hostile and how it is announced. In other words, the difference lies in how the deal is communicated to the target company's board of directors, employees, and shareholders. Acquisition In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its organizational structure. An example of this type of transaction is Manulife Financial Corporation's 2004 acquisition of John Hancock Financial Services, wherein both companies preserved their names and organizational structures Management Acquisitions Or management-led buyout (MBO), company’s executives purchase controlling stake in another company, taking it private. typically financed disproportionately with debt, and the majority of shareholders must approve it. For example, in 2013, Dell Corporation announced that it was acquired by its founder, Michael Dell How are acquisitions financed - Cash, stock, assumption of debt or combo - Smaller deals, acquired assets for cash, merely a shell and eventually liquidate etc. - Reverse merger → private company becomes publicly listed in short period of time, when private company strong prospects, eager to acquire all another company’s assets, buys all for cash, other company merely a shell and eventually liquidate How are M&A’s valued 3. price to earnings ratio, multiple of the earnings of company 4. enterprise value to sales ratio multiple of revenues while aware of price to sales ratio of other companies in industry 5. DCF → current value, according to estimated future cash flows, forecasted free cash flows (net income + depreciation/amortization change in working capital) discounted to present value using company’s Weighted Average Cost of Capital. (company's average after-tax cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt. As such, WACC is the average rate that a company expects to pay to finance its business.) ▪ Free cash flow → cash that a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the non- cash expenses of the income statement and includes spending on equipment and assets as well as changes in working capital from the balance sheet. 6. Replacement cost → cost of replacing target company, sum of equipment and staffing costs Why do companies keep acquiring other companies? 2 key drivers are competition and growth o One solution is to acquire competitors so that they are no longer a threat. Companies also complete M&A to grow by acquiring new product lines, intellectual property, human capital, and customer bases. Companies may also look for synergies. By combining business activities, overall performance efficiency tends to increase, and across-the-board costs tend to drop as each company leverages the other company's strengths. Anatomy of an M&A Deal 1. Preparation a. Assemble internal working team b. Develop initial acquisition plan/road map, may hire adviser like investment bank, good knowledge of market help identify a target, c. Assemble acquisition team d. Prepare list of targets 2. Selection a. Identify final candidate b. Proposal to target company if open to sale c. confidentiality agreement (before any info exchanged and before due diligence) d. Valuation and pricing (if company out of cash, issue shares or borrow through debt finance, both cases need banking team of law firm) e. Determine financing/structure of transaction (share/asset purchase) f. Early negotiation g. Letter of intent or heads of terms (non binding record of terms parties agreed to at that point, forms basis of the acquisition agreement) 3. Negotiation a. Due diligence (worth buying, and on what terms it should be bought, forms basis of acquisition document) b. Detailed bidding and negotiations 4. Agreement a. Structure legal documents (Share Purchase Agreement which is the key acquisition document) b. Obtain shareholder/third party consents and approvals c. Prepare for signing/closing (conditions precedent checklist) d. Closing (or period before) (depends on regulatory approvals) 5. Post-Closing a. Regulatory approvals and any other approvals b. Integration If public company acquisition, then timetable set by takeover regulations and different steps Role of trainees - Early drafts and reviews of corporate documents - Incorporating new companies (at Companies House) and carrying out company searches - Conducting due diligence and drafting due diligence reports for clients - Coordinating overseas counsel - Running the closing process (including the conditions precent checklist) - Arranging for signing to take place Lawyers - Minimise risk and achieve goals in most effective and efficient way possible, identify goals and make sure can achieve within context of legal framework - Acquisition structure - Coordinate with other departments - Negotiation - Due diligence - Draft and review of documents - Approvals - Closing Acquisition Structure - Share purchase → change in ownership o Buyer acquiring company by purchasing shares, o Need majority stake but most buyers want 100%, want voting control, complete remit in decision making, not vulnerable to other shareholders o Negotiate directly with shareholders or through management but with shareholders as they are selling shares to you o Company continues to operate, just new owners o Little trade disruption o Suppliers and customers are still transacting with company, just signing stock transfer form, passing over to new owners - Asset Purchase → buying specific assets and liabilities of a company o Can cherry pick, only agreed assets and liabilities transferred o Can leave unprofitable or undesirable parts of a company behind, o Seller will continue with remainder o Negotiate with seller, not share holders Share purchase Asset purchase Pros - Minimal disruption to the company - Only assume the assets and (customers may not even know) liabilities you want - Lower risk of hidden liabilities - Assets and liabilities transfer - If largely interested in something automatically – including contracts, specific goodwill, IP, etc. Cons - Acquire the unwanted - Seller may need consent from third assets/liabilities parties to transfer contracts - May face unknown liabilities, no - Supplier may renegotiate or exit autonomy to leave anything behind - If material contract, big cost if exit with seller - May be more complicated/time - Debts and unprofitable businesses consuming - Discover during due diligence, - IP restrictions etc. unknown liabilities such as potential - Change of control clause lawsuits, need to carve out in - Discovered during due diligence, in acquisition agreement, defend suit loan agreement for example, if despite not knowing liability change of control, say need to get consent from lender before ownership changed Another way to structure an acquisition: carve-out! - hybrid between an asset purchase and a share purchase. In a carve out, you may move the relevant assets to a particular business entity and then sell the shares in that unit. Raising finance 1. equity finance a. This refers to raising finance by issuing (selling) shares. This could be in the form of an Initial Public Offering, which is the process by a which a company issues its shares to the public for the first time. Alternatively, a company may issue shares to its existing shareholders, offering them greater ownership in the company, in return for more money. b. The benefits of raising equity finance is that the company does not have to pay its investors back the money raised, even if the company becomes insolvent. This means no interest payments, which could otherwise eat away at the cash flow after the acquisition. c. On the other hand, issuing shares means losing some ownership, and typically control, of the target company. These shareholders will be able to participate in the future performance of a company. 2. debt finance a. This refers to raising finance by borrowing money. A company may borrow by issuing bonds or receiving a loan from a bank. b. While a company will have to repay the money back, it does not have to give up ownership of the company. That said, a bank may take security over one of the acquirer’s assets, or even the target company, in order to protect itself in the event of non-payment. Method of payment (share purchase) A company will usually pay for an acquisition in cash, shares, or a combination of both. Cash is a good option if the buyer is confident in the acquisition. If it believes the shares are going to increase in value (thanks to synergies), paying in cash means it can soak up the benefits and doesn’t have to give up ownership of the company. It is, however, expensive to pay in cash. The buyer must raise money if it doesn’t already have enough cash reserves. It can’t also rely on future profits to pay off the shareholders. The seller (shareholders) will usually prefer to be paid in cash. The money they receive won’t be tied to the future performance of the company and the shareholders know what they can expect to receive. Shares can be attractive for the buyer because it means it doesn’t have to use cash or borrow. Likewise, if it feels its share price is overvalued, a share purchase can mean the acquisition is cheaper compared to cash. Receiving shares can be valuable for the seller if it has confidence in the acquisition as it means they’ll gain equity in a valuable company that it expects to grow. This was valuable to the WhatsApp shareholders, for example, as the Facebook acquisition gave them an opportunity to participate in its future profits. There are also tax benefits: for example, unlike cash, it may not be taxed immediately. On the other hand, receiving shares comes with risk. What happens if the synergies fail to materialise and the value of the shares fall? If the acquirer is less convinced in the synergy gains, this will allow the seller to share the risk. However, it comes at the cost of giving up part ownership of the company. Interview Questions: The Acquisition Process What is a share purchase? A share purchase is the purchase of a company through the acquisition of its shares. It involves a company acquiring a majority stake in a company, although buyers will often want to buy 100%of its shares. What is an asset purchase? An asset purchase is the purchase of some or all of a company’s assets by the acquirer. A company wants to buy a profitable business from Company X, but it does not want to take on Company X's unprofitable businesses, should it structure the acquisition as a share purchase or an asset purchase? We suggest the company structure the acquisition as an asset purchase. This is because the structure will allow the company to only purchase the profitable business from Company X and leave out the rest of the unprofitable businesses. A share purchase, on the other hand, would have meant that the unprofitable businesses would have automatically transferred to the buyer. Name three ways a company can raise finance for an acquisition. 1.Issuing shares 2.Issuing bonds 3.A loan from a bank Why would a company choose to issue shares over debt to finance an acquisition? Name two reasons. 1. It means raising finance without having to pay interest payments, which can eat away at the company’s future profits. 2. It will be easier for a company to borrow in the future because it has a lower proportion of debt.Why would a company choose to raise debt finance over issuing sharesto finance an acquisition?Name two reasons. 1.It has tax benefits (interest payments are tax deductible). 2.It means raising finance without existing shareholders having the value of their shares diluted. What would a lender need to know before it provides finance to an acquirer? Name three pieces of information. Loan details - Size - Duration - Purpose The acquirer’s financial information - Revenue/profits - Cash flow - Assets and liabilities Security - What fixed assets are available as security for the loan? - The presence of other lenders and existing security When would a seller prefer to be paid in shares instead of cash? When the seller expects the company’s share price to rise. Being paid in shares offers the seller the opportunity to participate in the future growth of a business. What departments in a law firm are involved in advising a buyer undertaking an M&A deal? Depending on the nature of the deal, any of the following could be involved: - Corporate - Tax - Finance - Real estate - Employment - Intellectual Property - Competition Which department will typically coordinate the deal? - The corporate department. What is a buyout? This is the purchase of a company or a controlling interest in a company’s shares. This may happen when a company’s existing managers wish to take control of the company (in which case it is normally termed a ‘management buyout’) or when a private equity house wishes to acquire a controlling stake using third party debt to make the acquisition, (in which case it is normally termed a ‘leveraged buyout’). Management buyouts (MBOs) provide an exit strategy for large corporations that want to sell off divisions that are not part of their core business, or for private businesses whose owners wish to retire. The financing required for an MBO is often quite substantial and is usually a combination of debt and equity that is derived from the buyers, financiers, and sometimes the seller. Leveraged buyouts (LBO) use significant amounts of borrowed money, with the assets of the company being acquired often used as collateral for the loans. The company performing the LBO may provide only 10% of the capital, with the rest financed through debt. This is a high-risk, high-reward strategy, where the acquisition has to realize high returns and cash flows in order to pay the interest on the debt. The target company's assets are typically provided as collateral for the debt, and buyout firms sometimes sell parts of the target company to pay down the debt - significant restructuring, we're looking more along the lines of a merger - owning the company that's being bought out can be a real windfall for investors. That's because if the company being bought has shown respectable performance and has good prospects for the future, a certain amount of goodwill may be involved. - Goodwill usually accounts for intangible assets, though if those assets weren't factored into the stock price when you purchased your shares of the company being bought, DRAFTING AND NEGOTIATION - NDA/Confidentiality Agreement o Target information, acquisition information, due diligence o Draft prepared by legal advisor o Scope of obligations in relation to commercial sensitive info, procedure for handling confidential info (code names, secure data room), remedies o Terms, definition exclude sinfo in public domain, authorised person, buyer undertaking (return confidential information, physical copies if digital, destroy)– return/destroy - Letter of Intent o High level document with principal commercial terms, guide parties until closing, binding and non binding terms, early review of problems commit parties, identify areas for negotiation, price range, some warranties, how acquirer planning to finance acquisition o Has overview, timetable, structure, price, principal terms, scope of due diligence process, exclusivity and confidentiality o Exclusivity → bargaining power, needs to be certain, lock out clause, if seller decides to terminate, compensate, incentive to continue talks in acquisition process o Exclusivity → clause gives the buyer exclusivity for period of time, same remedies as confidentiality, if breached, sued for damages or seek injunction to stop. Are restrictions, lock out clause DUE DILIGENCE What is it? Due diligence is the process of investigating a company to determine a) whether it’s worth buying and b) on what terms it should proceed. For example, information uncovered during due diligence will influence the kind of protections a buyer will want in the acquisition agreement. Underlying the process of due diligence is the principle of caveat emptor, which means “let the buyer beware”. This legal principle means it’s up to the buyer to fully investigate the company before entering into an agreement. In other words, if the buyer failed to discover something during due diligence, it’s their problem. There’s no remedy after the acquisition agreement is signed. Real value proposition – confirm factual assumptions and valuations Warranties and indemnities allocate risks and protect parties Determine approvals and consents needed, e.g. change of control clause, notify banks etc. Due diligence also helps to determine the valuation of the company. By extensively investigating the company, the buyer will be able to identify all the opportunities and risks involved in an acquisition. If it discovers an issue that it can’t solve through a term in an agreement, it can try to knock down the purchase price. In an asset purchase, due diligence is also an opportunity to identify all the consents and approvals the buyer needs to acquire the company. Preparation Information about the target company will be secured in a data room. This used to be a physical location but the information is now generally contained in a secure virtual system. The buyer will send a due diligence questionnaire to the seller asking questions about the target company and asking for information and documentation. The buyer will then send follow up questions based on the information it receives. Teams There are other types of due diligence. Financial due diligence will involve investigating the target’s finances and business due diligence will focus on strategic and commercial issues. Lawyers will not just flag up all the legal problems. Good law firms will have a system for detailing to the client only the most salient issues and then suggesting ways to tackle the situation, such as a reduction of the purchase price, a term in the agreement or walking away. Interview Question: What practice areas could be involved during due diligence? A useful structure for this is to begin with corporate and then discuss several legal departments and how they would be affected. You can mention both what the practice area will investigate and also the reasons for investigating those issues. As you know, while corporate leads and coordinates the M&A transaction, they will often seek input from other departments to advise on those specialist matters. Let me run through the practice areas with a few examples: - Trainees can be drafting questionnaire, liaising with local counsel, ask the questions that will bring the most values, to make the right decision Corporate: Does the target company have the authority to sell its assets? Which parties will enter into the contract? If it’s an asset purchase, are there any restrictions on the directors selling the assets? If it’s a share purchase, are there any restrictions on the shareholders transferring their shares? To determine these things, the buyer will investigate the company information and what we call the “constitutional documents” of the target company. They will also check the directors and shareholders information and the minute books. If so, need some resolution to lift restrictions Finance: When a target company borrows money, lenders will often ask for security. We want to know: what assets are subject to a charge (this security)? If there are, we might want to make sure these are discharged before we buy them. We can check the charges register for this. Security → for lenders to have protection in default, repossess and sell asset. Sometimes, the lender will also include a “change of control” clause in the loan documentation. This will be triggered in a share purchase because there is a change of control. So we need to check the loan documentation to see what the consequences of a change of control are. For example, the lender may accelerate the loan payments or consent needed, have the right to terminate the loan We also want to check how much debt the target company has together with other financial information. Employment: Who are the employees? What is the pension situation? Are we complying with employment legislation? Are there any key managers we want to stay in the company? Property: Is the property in a good state? Does it need to be repaired? For this, we can conduct a site visit or even a survey. Has the relevant planning legislation been complied with? Must carve it out in the acquisition agreement or end up paying for it. Intellectual Property: So, we’re thinking about copyright, patents and trademarks here. This is often harder to transfer in an asset purchase if it is even possible, which means we need to check all the relevant documents. We might conduct searches to identify what IP the company has and then find out whether there are any existing or threatened infringement actions. Licensing agreements? Litigation: Is there any existing or threatened litigation? We need to check claims but also correspondence that suggests an employee or a customer is unhappy, future claims, breach of contract. We want to work out the risk of any future claim. PROVIDE PRACTICAL SOLUTIONS 7. See if the buyer can resolve, pay party off, of investigate further, softer approach, 8. Adjust purchase price, but if hard to value something not materialised yet, reflect additional cost 9. Put money aside (e.g. in escrow), more relevant, money put in separate account, payout made if the claim does arise, to cover cost 10. Insert term in an agreement, relevant, warranties or indemnities, indemnities are relevant here as you found the litigation claim, specific, known risk, indemnified if litigation claim made against company 11. Walk away, if serious issue, reputation damage, if cannot carve out, expensive option, last resort but could save money down the line. ACQUISITION AGREEMENT AND WARRANTIES AND INDEMNITIES - After DD, negotiation and drafting of acquisition agreement o SPA! o Important clauses and general structure ▪ Definitions (structured and alphabetical) ▪ Conditions & closing (conditions precedent before closing, need to be fulfilled before M&A deal goes ahead, must either meet condition or waived before completion.) Examples → bank discharge security, or regulatory approval, proceed with signing acquisition document but transaction not complete until condition for regulatory approval is satisfied ▪ Sale and consideration Asset purchase → all assets being bought and sold, provisions for price adjustments in case of basis on which valuations are made change, provision allowing you to verify that price paid reflects actual value of assets at date of completion, maybe different if signing takes place early ▪ Warranties and indemnities ▪ Boilerplate clauses → notices clauses, cost assignments, 3rd party rights ▪ Choice of law/jurisdiction → location or alternative dispute resolution, if dispute, who is going to hear dispute. No court, arbitration or mediation. WARRANTIES AND INDEMNITIES - Warranties - Buyer side little, just how funding acquisition o Statements of fact about state of company or assets/liabilities o Seller may warrant that target isn’t involved with litigation, contractual promises, in breach can give rise to damages o Use them to disclose information not found during due diligence, however, disclosure letter drafted containing exceptions qualify saying except this litigation suit and other litigation suit, qualify against, allocate risk, provide protection for unknown liabilities Seller protects itself and buyer gets additional info about the company not known o during due diligence o Remedies → damages for breach of contract, position would have been in had warranty been true, typically measured by fall in value of shares o Limitations → time periods/caps/minimum amounts, - Examples o Has authority to enter into agreement and sell assets o Warranties relating to state of assets, property has good title, no disputes or notices against title, good repair and conditions, accurate info, o Warranty claims difficult to bring, law compensates buyers by putting in position they would have been in had the warranty been true, claim warranty was untrue and demonstrate loss/damage which was caused by breach o Damages → market value of business had warranty been true – actual market value ▪ in share purchase, difficult, not just asset purchase, usually measured in fall of target company’s shares as result of breach. Value of share fallen, suffered damages, can agree to pay-out on indemnity basis, but depends on party’s agreement. Seller push back, time periods, caps minimum amounts. Indemnities - promise to compensate party for identified loss o could happen o reallocate costs o known and specific liabilities o useful if not caught by warranties o risks identified by due diligence or disclosure letter o indemnity is not about knowledge o useful for risk of claim that cannot be quantified o cannot push back on price, don’t know how to value o so indemnify against the actual cost, clear difference that indemnities for known liabilities, warranties for htings not known about during acquisition agreement o Examples ▪ Environmental/litigation issues ▪ Product liability or tax issues ▪ No duty to mitigate loss or take reasonable steps to protect Remedy Recovery on pound for pound basis - Reimbursed for all loss suffered as result of litigation claim - Warranty, based on value of shares falling, which may not be as much as the money you are due Representations - Statements of fact about target company which induced buyer to enter contract - Benefits in remedy, right to terminate agreement, if critical clause untrue, end contract, back to position - SPA seller will usually exclude representations due to strong remedies - Remedy o Damages o Rescission o Puts claimants position would have been in had no entered contract Negotiating and Drafting Interview Q&A What is due diligence? Due diligence is the process of investigating a company to determine a) whether it’s worth buying and b) on what terms it should proceed. Information uncovered during due diligence will influence the kind of protections a buyer will want in the acquisition agreement. What is the purpose of legal due diligence? - Underlying the process of due diligence is the principle of caveat emptor, which means “let the buyer beware”. This legal principle means it’s up to the buyer to fully investigate the company before entering into an agreement. In other words, if the buyer failed to discover something during due diligence, it’s their problem. There’s no remedy after the acquisition agreement is signed. Therefore, the due diligence process influences the terms the buyer will seek in the agreement. - In addition to determining whether a company is worth buying, due diligence also helps to determine the value of a company. By extensively investigating the company, the buyer will be able to identify all the opportunities and risks involved in an acquisition. If it discovers an issue that it can’t solve through a term in an agreement, it can try to knock down the purchase price. - In an asset purchase, due diligence is also an opportunity to identify all the consents and approvals the buyer needs to acquire the company. What departments of a law firm may be involved in legal due diligence? Examples include corporate, finance, employment, property, intellectual property and litigation. What information will be investigated during legal due diligence? Corporate: Does the target company have the authority to sell its assets? Which parties will enter into the contract? If it’s an asset purchase, are there any restrictions on the directors selling the assets? If it’s a share purchase, are there any restrictions on the shareholders transferring their shares? To determine these things, the buyer will investigate the company information and what we call the “constitutional documents” of the target company. They will also check the directors and shareholders information and the minute books. Finance: When a target company borrows money, lenders will often ask for security. We want to know: what assets are subject to a charge (this security)? If there are, we might want to make sure these are discharged before we buy them. We can check the charges register for this. Sometimes, the lender will also include a “change of control” clause in the loan documentation. This will be triggered in a share purchase because there is a change of control. So, we need to check the loan documentation to see what the consequences of a change of control are. For example, the lender may accelerate the loan payments or have the right to terminate the loan. We also want to check how much debt the target company has together with other financial information. Employment: Who are the employees? What is the pension situation? Are we complying with employment legislation? Are there any key managers we want to stay in the company? Property: Is the property in a good state? Does it need to be repaired? For this, we can conduct a site visit or even a survey. Has the relevant legislation been complied with? Intellectual Property: So, we’re thinking about copyright, patents and trademarks here. This is often harder to transfer in an asset purchase if it is even possible, which means we need to check all the relevant documents. We might conduct searches to identify what IP the company has and then find out whether there are any existing or threatened infringement actions. Litigation: Is there any existing or threatened litigation? We need to check claims but also correspondence that suggests an employee or a customer is unhappy. We want to work out the risk of any future claim. If a law firm uncovers a significant problem when undertaking due diligence, what options could it suggest to the client? Depending on the circumstances, examples include finding out more information, asking the seller to resolve the issue before proceeding, including a term in the contract to protect the party (e.g., warranty, indemnity or conditions precedent), setting aside some of the purchase price, or walking away. Is it ever right to tell a client to walk away from an M&A deal? Yes, sometimes this is a necessary option if the risks of an acquisition are too high. What are warranties? Warranties are statements of fact made by the seller about the state of the target company/its assets and liabilities. For example, the seller might say: “X Company is not subject to any litigation” or “X property is in good repair”. If it later turns out that the party is subject to litigation or the property was in poor conditio n,then the buyer could sue for breach of warranty. The buyer will then have the right to damages. What are indemnities? Indemnities are promises to compensate a party for identified costs or losses. Sometimes, during due diligence, the buyer will uncover an event that could happen. In this case, the buyer wants to make sure it is protected so they will ask for an indemnity: the seller will promise to pay the buyer a particular amount if that event does happen. What are representations? If they seller made a statement of fact about the target company which induced the buyer to enter into the acquisition agreement then this will be a representation What are the differences between warranties and representations? For our purposes, the key difference is that a claim for misrepresentation could give a right to terminate the contract. What are the differences between warranties and indemnities? Key differences include: - With an indemnity, in theory, all losses can be recovered on a £ for £ basis if a particular event takes place. A warranty is subject to the claimant taking reasonable steps to mitigate loss and rules of remoteness (whether the loss/liability was reasonably foreseeable) –don’t worry too much about this for our purposes, just note that it is typically easier to recover money with an indemnity. - Indemnities are useful for specific, known liabilities, whereas warranties are useful for unknown liabilities/losses (because disclosure could prevent a successful claim for breach of warranty). - A party must prove various elements of a warranty in court. For an indemnity, if the specified event takes place, the other party has the right to be indemnified. If the buyer finds there was a breach of warranty by the seller, what could it do? The buyer could make a claim for breach of warranty at court. The buyer must remember it needs to take reasonable steps to mitigate against its losses flowing from that breach. If the buyer wants to take a less aggressive stance, it could directly approach the party and seek some form of recovery. Indemnities are contractual promises by the seller(s) to meet a specific potential legal liability which a buyer may incur as a result of an acquisition. An indemnity would entitle the buyer to a payment if the event giving rise to the indemnity occurs. A buyer should seek to include indemnity protection in the sale and purchase agreement (SPA) in respect of any liabilities it discovers in DD that have not yet crystallised or are not yet quantifiable. It is customary on a share acquisition for the SPA to make provision for certain tax liabilities to be for the account of the buyer, and others for the seller(s), and for indemnities to be included in this respect (referred to as a ‘tax covenant’). Earn-out clause? Found in M&A Purchase Price Clause - Why? o Value target based on DCF (discounting of future expected, uncertain cash flows, forecasts of future earnings), e.g. on verge of economic breakthrough, depends on improvement of structural factors or synergies etc. o Or buyer not in position to finance the full purchase price immediately o Bridge different expectations in valuation of company, avoid failure of transaction o typically "prospective" pricing approach of a seller and a typically "retrospective" pricing approach of a purchaser. Advantages - Seller → seller can participate in positive economic development of target company after completion of transaction as the earn out amount cannot become negative in event of negative development - Buyer → reduce buyer’s risk of paying excessive purchase price, may use in due time dividend received from the target to pay the earn-out amount(s). Disadvantages - Seller → question of whether earn out is paid depends on future events, harbours potential for abuse, seller cannot exercise influence on target company after transaction been consummated, buyer can deliberately frustrate achievement of targets for earn out, impede by wrong decisions of buyer, - Buyer → deprives buyer of possibility to make fixed risk deduction in company valuation and reduce purchase price in favour. Restriction of freedom of action in

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