Specifics - Warranties, Staff, Intellectual Property Rights, Debts

              There are many areas of particular concern, but in particular a lot of time is often dedicated to:

              WARRANTIES

• These are guarantees that the seller gives that all is well with the business.  To the extent that all is not well, and there are very few businesses that are perfect, the seller will wish to ensure that such imperfections are disclosed to and excluded from the warranties.  The scope and drafting of warranties is tailored exactly to the business in question.  For example, if a business is driven by a technological invention or development, detailed warranties as to the ownership of the technology, the status of any registrable intellectual property rights to the technology, the ability of the business to use the technology without infringing any third party rights and the lack of any third party already using or threatening to use those rights.  If a business has been running for many years with variable trading, then detailed warranties as to tax liability will be required.  The role of the seller's lawyer is to explain the scope of the warranties to the seller, to investigate whether there are any general restrictions that should be made to the warranties and to prepare the list of disclosures which will limit the warranties and protect the seller.  In parallel with this process, the parties will be negotiating who will be giving the warranties and how much liability they should carry.  In a full sale,  it is normal for the seller to warrant up to the price received by them, but in an investment situation, the company itself usually warrants up to the amount invested, with cash limited warranties being required from executives in the business.  Warranties are also generally bottom limited (to avoid trivial claims) and time limited (usually on the basis that once one or two years worth of accounts have been prepared and approved after the transaction, the buyers will know all that can be known)

              STAFF 

• Very specific attention is given to key staff, as with many businesses staff are the basis of their value.  Two approaches are generally used; positive, and restrictive (often both in the same transaction):
• Positive - here the buyer looks to incentivise the staff to stay at a time of uncertainty over the change of ownership.  Measures range from simple bonuses to complex option schemes which become exercisable in tranches after time delays, often with numbers increasing if the business grows.  Various tax efficient schemes are often adopted for such option schemes.  In addition, deals are often reached for extended periods of notice for key staff and simple salary rises.
• Restrictive - buyers will try and restrict what key staff can do for a period after leaving the business.  Since this is a restraint of trade for those staff, complex, and moving, limits are placed upon what an employer can lawfully achieve.  Shares held by employees can be made subject to claw back if they leave, with the price to be paid to them dependant on the leaving status of the employee.

             INTELLECTUAL PROPERTY RIGHTS

• Ownership and transferability of all the non - tangible rights that a business needs to thrive.  It is crucial that the rights to use, for instance, computer software, will be unaffected by the transaction - some software licences contain change of control clauses that cause them to terminate if the licensee is bought by a competitor.  In addition, many IPR licences will be limited in the use to which the rights are put, so a buyer of a company may find that the synergies that he hoped to gain by merging his business with that of the company are not available because he does not have access to the rights that he needs.

             DEBTS 

• It is quite common for investments or buyouts to be financed by debt rather than equity issue.  The structure of that debt and its securitisation are crucial to the proper functioning of the deal.  Whilst much of the commercial negotiation will come over the servicing terms of the debt (interest rate, whether interest is rolled up or payable regularly, convertibility of debt into equity under certain circumstances etc), much of the legal issues arise from the need to securitise.  From the business' perspective, granting security over its assets must not interfere with its ability to function normally (e.g. the company must be able to buy and sell stock without reference to the lender). For "traditional" assets (land and goods), the law is well developed and "standard" charge documentation can be used.  Where a business has more intangible assets, considerable thought is required to ensure that effective but non-intrusive security is obtained.