Mergers and Acquisitions: Heads of Terms

The third in our series on the practical aspects of running a successful mergers and acquisitions transaction, this article looks to highlight the key elements of a Heads of Terms. Please see our news section here for other publications in the series.

  1. What is a Heads of Terms?

When entered into, in the context of a share sale and purchase, a Heads of Terms (which can also be referred to as a Letter of Intent, Memoranda of Understanding or Term Sheet), is entered into relatively early in the transaction for the purpose of the parties recording:

a) The main terms of a preliminary non-binding understanding, intended to lead to a binding contract or series of contracts for an entire project or transaction.

b) An agreement to set out the key terms of a transaction, which contains some binding terms and some non-binding.

c) The terms of a preliminary binding agreement, again intended to deal with certain preliminary matters prior to the signing of a contract to cover the whole project or transaction.

2. Is it legally binding or not?

Above we mention the fact that a Heads of Terms can be non-binding, partly binding or entirely binding with additional terms. The answer to the question therefore invariably depends on what the parties have agreed to at the outset but in the majority of cases we would find that a heads of terms contains only some provisions which are agreed to be binding by both parties. That brings us to the next question.

  1. What provisions are covered in a Heads of Terms?

A standard heads of terms will generally contain provisions including but not limited to:

a) Commercial Terms

This will set out the overall agreement between the parties. For example Investaco Limited intends to acquire 50% of SellCo Limited for a price of €10m subject to completion of financial, legal and commercial due diligence.

b) Time Limits

A deadline for completion of the transaction and execution of a binding Share Sale and Purchase Agreement would generally be included, as well as confirmation of the timelines relating to completion of due diligence.

c) Pre-Conditions

It might be necessary to set out any pre-conditions to completion such as the approval of the Competition and Consumer Protection Commission, consent of existing customers or secured creditors, or even the conclusion of a commercial agreement by the target company with a new customer without which the deal may not be commercially viable for the purchasing company.

d) Confidentiality

Where a separate Non-Disclosure or Confidentiality Agreement has not been entered into then it is usual for the Heads of Terms to contain a binding confidentiality clause with mutual restrictions on both parties, as in most cases confidential information is likely to be exchanged by both parties.

e) Exclusivity

This is usually a binding provision in the Heads of Terms as the Purchaser will want to ensure that the seller is not at the same time using their bid to attract another buyer at a higher price, potentially wasting the buyers time and resources.  The exclusivity clause would generally be limited to a specified time period so as to ensure the buyer has an incentive to complete their due diligence in as an efficient manner as possible.

f) Transaction Advisor Details

Details of the advisors appointed by each party including financial and legal.

g) Costs

A provision setting out that each party will be liable for its own costs, or where the parties agree that one party would be responsible for the costs of a portion of or all of the other parties costs in particular circumstances.

h) Jurisdiction and Governing Law

This is not an exhaustive list and every heads of terms will be different in its form and content.

Conclusion

This is a just a flavour of the content of a Heads of Terms which can be as simple or as complex as the parties require. As stated above it is generally the pre-cursor to a more complex and biding agreement to follow with care required to ensure that the parties don’t commit to a binding agreement where this was not intended.

In the next article, we will look at the advantages of using heads of terms.

If you would like more information on this topic or any other of the topics in our series on Mergers and Acquisitions, contact:

10 steps to buying a house  

The prospect of buying a house, whether you are a first-time buyer, trading up or downsizing can be both exciting and daunting. We have outlined the process below, with the aim of providing a simplified guide to the process. It must be noted however, that each transaction will have its own nuances and peculiarities to be addressed.

The process below involves the purchase with a mortgage, via private treaty (i.e. offers made through an auctioneer and not a purchase at an auction).

1.      Identify and secure the right property at the right price.

2.     Pay booking deposit to the auctioneer. This is a holding deposit only and a gesture of good faith. It should mean the property will not be actively marketed pending your opportunity to carry out due diligence in respect of the legals, survey etc.  The agreement will not be binding until such time as a contract is signed by you and the vendor.

3.     Instruct a solicitor to act on your behalf and ensure it is someone you can have confidence in and relate to.  Cheapest isn’t always the best!  Your solicitor should provide a budget for the purchase to include fees, costs and outlays (e.g., stamp duty, land registry fees) which you will incur in respect of proceeding to purchase this property.

4.    Organise a survey of the property to be carried out by a suitably qualified engineer with appropriate professional indemnity insurance.  The engineer should also be asked to check the boundaries and, in particular, that the boundaries on the ground are accurately reflected in the title map.  The engineer should also be asked to carry out a planning search and advise you of any relevant matters prior to committing to contract.

5.     Secure a formal loan sanction and be aware of the terms of which the bank will lend you the funds to complete your purchase. Usual conditions include life cover, fire cover/ home insurance valuation, etc

6.     Your solicitor will carry out due diligence once in receipt of contract from the vendor’s solicitor.  The due diligence will include the following and a report is to be provided to you as the purchaser; (a) investigate title and whether leasehold or freehold and consequences of same; (b) advise on planning in conjunction with the surveyor’s report; (c) investigate position regarding access and services (i.e. water/sewer) at property including any wayleaves affecting; (d) review the position in relation to property taxes to include local property tax (LPT) and non-principal private residence (NPPR) charges; (e) review the special conditions in the contract for sale and advise the purchaser in respect thereof.

7.      Once you are satisfied with all of the above, only then will you be in a position to commit to the contract.  This process usually takes around 4 weeks from the payment of the booking deposit.  On signing the contract, a 10% deposit is payable less any booking deposit already paid.  The vendor then countersigns the contract at which point it becomes binding and completion date is agreed which is usually 2 – 3 weeks thereafter.

8.    Your solicitor attends to the drawdown of loan funds and provides a statement of account for you to provide the balance, including stamp duties, land registry fees and costs.

9.     On completion, your solicitor pays over the balance of funds in return for the title deeds and the keys.  You should attend to transferring of utilities, e.g. organising your electricity/gas etc.

10.  Your solicitor will attend to stamping and registration of title and mortgage. Once the registration process is completed, the deeds will be returned to the bank who will hold the deeds during the term of the loan.

While the above is a simplified guide, we hope that it outlines the process to allay some concerns or queries. At each stage, difficulties may arise that require an experienced legal team. At J.W. O’Donovan, we have an extensive property practice and act for a range of clients in the sector – to include: developers, banks, commercial landlords, and private clients. It is this wide range of practice within the property sector that allows us to tailor our advices to suit the particular needs of each and every client.

For more, please contact a member of our property team by email to mail@jwod.ie or via telephone on 021-7300200.

JWOD Partner Patrick Bradley appointed Chairman of the Law Society’s Probate and Trusts Committee

J.W. O’Donovan Partner Patrick Bradley, has been appointed as Chairman of the Probate and Trusts Committee of the Law Society of Ireland, which monitors and advises its members on best practice in this area as well as making representations on behalf of the Society to relevant stakeholders.

Patrick practices in estate planning, probate and tax law along with commercial and property law. He has extensive previous experience of lecturing at the Law Society, as well as the Institute of Taxation, and is a member and past Chairman of the Law Society’s Taxation Committee.

J.W. O’Donovan welcome guests to Winter Wine-tasting event at St. Peters

Last week,  the J.W. O’Donovan team welcomed guests to our Winter Wine-tasting event in the beautiful surroundings of St. Peters.

Guests were greeted with a drinks reception, with music from an instrumental swing jazz trio before a fascinating masterclass by wine expert Beverley Mathews of l’Atitude 51. Beverley shared her tips on how wines can be identified, which we put to the test for the next part of the evening – speed wine-tasting.  Attendees moved from table to table, tasting and debating, with the aim of identifying all six wines. One skilful taster, Cathy Fennessy, identified the most correct answers, winning two bottles of wine.

Our sincere thanks to all of those who came along.

  • Free Pic No Repro Fee 14 November 2019  JW O Donovan Pictures Gerard McCarthy 087 8537228 More Info contact Ciara Flaherty Springboard PR & Marketing 021.4969000 086.0611012 ciara@springboardpr.ie
  • Free Pic No Repro Fee 14 November 2019  JW O Donovan Pictures Gerard McCarthy 087 8537228 More Info contact Ciara Flaherty Springboard PR & Marketing 021.4969000 086.0611012 ciara@springboardpr.ie

 

Why the Mediation Act is welcome

Following our recent review of the advantages of mediation, in this article, we will look at why the processes and procedures set out in the Mediation Act 2017 are welcome.

Obligations for solicitors to advise Clients on Mediation

The Mediation Act 2017 imposes new obligations on solicitors, including a statutory declaration. Under the Act, practising solicitors are required, prior to issuing proceedings on behalf of a client, to do the following:

  1. Advise the client to consider mediation as a means of attempting to resolve the dispute
  2. Provide the client with information in respect of mediation services, including the names and addresses of persons who provide mediation services
  3. Provide the client with information about the advantages of resolving the dispute otherwise than by way of the proposed proceedings, and the benefits of mediation
  4. Advise the client that mediation is voluntary and may not be an appropriate means of resolving the dispute where the safety of the client and/or their children is at risk
  5. Inform the client of the matters concerning confidentiality and enforceability of mediation settlements as set out in the Act

Section 14(2) provides that the originating document by which proceeds are instituted shall be accompanied by a Statutory Declaration made by the solicitor evidencing (if such be the case) that the solicitor has performed the obligation under Section 14(1) in relation to the client and the proceedings to which the Declaration relates.

While it may be thought that the mandatory nature of the provisions of Section 14 are somewhat incompatible with the Solicitor and the client having to consider when is the appropriate time to consider Mediation, having regard to the nature of the proofs available to the parties, the section does little more than oblige Solicitors to provide minimal advices to the client.

The Section clearly also applies to debt collection litigation.

Mediation Settlements can now be legally binding

We now have clarity about achieving a legally binding agreement in mediation. Any party to the mediation now has the right to decide if a legally binding agreement is required, drafted by the mediator, as an outcome of mediation. This is given statutory footing by Section 11 of the Act. Subject to this, a Mediation Settlement, as a compromise, “shall have effect as a contract between the parties”, save where it is expressly stated to have no legal effect until it is incorporated in a formal legal agreement or contract to be signed by the parties.

Limitation Periods are now extended

The Act extends limitation periods by the period commencing on the day on which the agreement to mediate is signed (presumably meaning the date on which all parties have executed) and ending on the day which is thirty days after either a mediation settlement is executed or the mediation is terminated. The mediator is obliged to inform the parties in writing of the date on which the mediation ends.

Conclusion

The statutory obligation now placed on solicitors to advise clients on Mediation has resulted in an increase in the number of Mediations and the demand for Mediators. The Act has provided solicitors and clients with a practical and cost-effective solution to deal with disputes quickly whilst avoiding the potential public exposure which can occur when litigating through the courts. Mediation will not be an appropriate resolution for all disputes, however it is a useful tool to consider before the issuing of court proceedings is contemplated.

In our next and final article on this topic, we will look at the role of each party in Mediation. For more information, contact: 

Ciara Lehane, Solicitor
clehane@jwod.ie

 

 

 

Mergers and Acquisitions: Pre-Transaction Steps

This article is the second in a series of publications by J.W. O’Donovan’s Corporate Team on the practical aspects of running a successful mergers and acquisitions transaction. To read the first, click here. 

Most people would assume that the starting point for the sale or purchase of a company is the agreement by the seller and buyer of a heads of terms for the transaction. However, there are a number of matters that should be considered at an early stage, even prior to any specific transaction being identified. These include:

  1. Review of Corporate Structure

A business owner who anticipates a sale of its business in the near to medium term should review its corporate structure to identify the target entity. It may be appropriate for any aspects of the business that would not form part of the sale to be ‘hived-off’ into other structures. Many long-established businesses have complicated group structures due to previous events such as management buy-outs. It may be advisable to simplify these by striking off or winding up dormant companies or merging subsidiaries with their holding companies.

  1. Tax Planning Considerations

It is critical that a business owner considers the potential tax arising on a sale of the business long before any sale is likely to occur. There are reliefs available but the criteria can be quite technical and specific advices should be obtained to ensure that such reliefs are availed of, to the maximum extent possible. An example might be where the owner’s spouse works in the business – if he or she is appointed as a director they may qualify for entrepreneurial relief or retirement relief on a sale of shares; such shares can be transferred between a husband and wife without any tax arising.

Aside from the personal reliefs that may be available on a sale of a business, many business owners are now choosing to hold a portion of their shares through a personal holding company as that holding company would be able to avail of an exemption from capital gain tax on a sale of such shares.

In order to qualify for some of the available reliefs, it may be necessary for the relevant structure to have been in place for a number of years prior to a sale. It may also be necessary to move any non-trading assets outside of the group (a ‘hive-off’ as described above).

  1. Vendor Due Diligence

One of the first steps that a buyer will take in a transaction will be to commence a due diligence exercise to examine the financial, operational and legal aspects of the target business. Significant issues identified in due diligence can result in indemnities being sought from the seller or a renegotiation of the commercial terms of the transaction. As a result, it can be advisable for a business owner who anticipates a sale to carry out its own ‘vendor due diligence’ exercise so that any issues in the business can be identified and remedied prior to a transaction commencing.

This exercise would cover matters such as:

  • review of internal financial reporting. If adequate management accounts and other financial records are not available it can make it difficult to justify a valuation when negotiating with a buyer,
  • review of commercial agreements to identify gaps in documentation, expired contracts in need of renewal and change of control clauses allowing the other party to terminate in the event of a sale of the business,
  • review of internal processes such as health and safety and data protection compliance,
  • review of employee contracts and policies to ensure all employees have been issued with a contract or memorandum of terms of employment and that each employee has received their legal and contractual entitlements.

Even if an anticipated sale does not materialise, the business will be on a better footing as a result of carrying out this internal review.

  1. Finance & Target Identification

On the buyer side, before engaging with a seller it is advisable to ensure that the necessary finance to carry out an acquisition is available. In recent years, a number of alternative lenders have entered the Irish market and have provided the finance for acquisitions. However, their requirements can be different from those of the pillar banks and it makes sense to engage with all potential lenders at an early stage in order to establish if they will be a good fit.

A buyer may also want to spend some time identifying potential targets in the relevant market and assessing their suitability for acquisition. Gaining a detailed understanding of the benefits that would result from a proposed acquisition in terms of potential synergies and efficiencies and growth in market share can be very important in ensuring a transaction is approved internally and in obtaining sanction from external lenders, where applicable.

  1. Identifying advisors

Both the seller and buyer will need to select advisors with the appropriate expertise to ensure their interests are represented and the transaction runs as smoothly as possible. For the seller in particular, firms that previously provided legal and financial services to the business may not have experience in large transactions and it may be necessary to appoint new advisors for the purpose of carrying out the transaction. In such event, it is important to ensure that the existing advisors work closely with those taking the lead on the transaction to pass on their relevant knowledge regarding the business.

Most large accountancy firms will have in-house tax advisory services but, in some instances, a separate tax advisor may be required. Furthermore, in some instances, minority shareholders may choose to take independent legal or tax advice.

In our next article in the series, we will cover the preparation of the heads of terms for a transaction.

For more information, contact:

 

To mediate or not to mediate: What are the advantages?

Mediation is now a central element in dispute resolution architecture. It is a flexible process conducted confidentially in which Mediators quickly and expertly help people in conflict to reach their own agreement together. Mediation was historically only used in Family Law issues. However, the commencement of the Mediation Act 2017 has resulted in an increased awareness and willingness by the judiciary to look to Alternative Dispute Resolution in appropriate circumstances.

The Legislation

The Mediation Act 2017,  which commenced on 1st January 2018, provides a statutory framework to promote the resolution of disputes through mediation as an alternative to court proceedings. The underlying objective of the Act is to promote mediation as a viable, effective and efficient alternative to court proceedings, thereby reducing legal costs, speeding up the resolution of disputes and reducing the disadvantages of court proceedings.

Certain types of disputes have been excluded, for example: – Arbitration, disputes which fall under the jurisdiction of the Workplace Relations Commission and Judicial Review proceedings.

Mediation in General

Section 6 sets out the relevant principles governing Mediation:

  • The parties may engage in Mediation as a means of attempting to resolve the dispute
  • Participation is voluntary
  • The existence of proceedings does not prevent the parties engaging in Mediation
  • Any party may withdraw from the Mediation at any time (including the Mediator)
  • A party may be accompanied to the Mediation and assisted by a person who is not a party to or obtain independent legal advice at any time during the Mediation
  • It is for the Parties themselves to determine the outcome of the Mediation and the fees and costs of the Mediation shall not be contingent on its outcome

What are the advantages of Mediation? 

Speed: Mediation offers a way to avoid the courts and seek an earlier agreement quicker rather than litigating through a congested courts system.

Cost Effective: The costs associated with resolving a case through mediation are generally substantially lower than costs associated with progressing cases through the courts. The costs are usually shared between the parties.

Confidentiality: Mediation is a private, confidential process which can benefit commercial entities who are seeking to protect their business and reputation during disputes. Accredited mediators are bound by confidentiality and either side of a dispute are only bound to disclose information voluntarily during mediation, whereas there is less disclosure control and more public exposure in a court setting.

Offers greater level of control: Mediation offers the ability for both parties in a dispute to maintain a greater sense of control over the process and settlement. Mediators are also able to explore more creative solutions to disputes, and aim to seek a mutually satisfactory outcome. A court setting normally results in a judge imposing a settlement on the parties involved.

Seeks a mutually-agreeable solution: Business relationships and reputations are critical to maintain. Finding a mutually-acceptable resolution to a dispute – particularly where a business relationship is expected to continue following that dispute – is a must for many and mediation offers this potential outcome. A collaborative approach to resolving a dispute can ameliorate any ill will in the relationship, whereas a court-imposed settlement often leaves one party aggrieved.

In our next article on this topic, we will look at the advantages of the Mediation Act 2017. For more information, contact: 

Ciara Lehane, Solicitor
clehane@jwod.ie

 

 

Introduction to Mergers and Acquisitions

Despite a business environment held hostage to the Brexit threat for the last three years, J.W. O’Donovan has seen continued growth and activity in the sale and purchase of Irish private companies. There has been particular activity around inward investment by foreign-based multinational companies either looking for an established business in Ireland or looking to further build on existing footholds they might have in the State.

We are often approached by clients and potential clients looking for guidance and advices on a potential sale or purchase of a company. For many, it is their first time involved in such a process. It can be a very daunting and, for some, overwhelming introduction to what has become a relatively forensic legal and financial process.

With that in mind, the Corporate team at J.W. O’Donovan will, through a series of upcoming dedicated articles, share some of the ins and outs of a typical share sale and purchase in relation to an Irish private company. In the first of the series, we look at the basic components of transactions of this type.

What is involved in a a private company sale or purchase? 

In terms of setting out what is involved in a private company sale or purchase in Ireland, a transaction can generally be broken down into its essential elements as follows:

  1. The Target company(s)

This is the company or indeed group of companies that are referenced generally as the “Target” entity, although it is actually the shares in the company that are being acquired.

2. The parties involved comprising the Seller(s) being the shareholder(s) in the Target company and the Buyer

The Seller can be an individual or holding company of the Target. Quite often, it will be a holding company for tax planning purposes, which enables an ultimate beneficiary to maximise reliefs available between grouped companies. We will touch on this again in later articles.

3. Pre-Heads of Terms discussions and negotiations

This stage includes a high level business review to evaluate price offering for the shares.

4. The Heads of Terms

The Heads of Terms is a document setting out the commercial terms reached between the parties.

5. Financial Due Diligence

At this stage, the buyer’s financial advisors will do a thorough analysis of the financial wellbeing of the Target company.

6. Legal Due Diligence

The buyer’s legal team will also do a complete review of key areas of the Target company including corporate structures, commercial agreements and HR records and policies.

7. Negotiation and transactional documentation

The primary documents including Share Purchase Agreement, Deed of Tax Covenant and Disclosure Letter are drawn up.

8. Approvals of Regulatory Authorities

Approval is sought from Regulatory Authorities such as the Competition and Consumer Protection Commission, where required.

9. Completion and transfer of funds

Once the transaction documentation is signed and funds are transferred to the sellers, the transaction is complete.

10. Post-completion integration

After the transaction completes, the two companies are then integrated on an operational level.

These are the components in their basic form but a transaction may have a number of ancillary or additional components. These may include pre-transaction corporate restructures such as the establishment of special purpose vehicles or the transfer of assets out of Target company to a special purpose vehicle or existing connected company.

No two transactions are the same. There are too many variables involved that dictate the manner in which a transaction proceeds. One fundamental difference between transactions and the parties involved is the contrast between the buyer’s objective and the seller’s objective.

A buyer is likely to be motivated by expansion plans with the target company being seen as a good bolt-on to an already established business in the same sector. A seller’s objective can sometimes be broader. For example, it may be the realisation of an investment, or a decision to move out of a particular market. Whatever the reason, from the outset of the process, both parties need to be clear on their objectives – what do they want to achieve, for how much and by when?

In our next article, we will go into more detail on the Pre-Transaction steps to be considered before engaging in the Sale/Purchase process.

If you would like more information on this topic, contact John Sheehan, Partner at jsheehan@jwod.ie or 021 7300200.

JWOD Managing Partner to sleep out in aid of Focus Ireland

JWOD Managing Partner,  Jerome O’Sullivan, is to take part in Focus Ireland’s Shine a Light Night, sleeping out for one night on Spike Island. The annual event, which takes place on Friday October 18th,  sees business leaders raise much-needed funds to combat the homelessness crisis in Ireland. The Sleep-out, which raised €1 million last year, will also take place in the Law Society of Ireland, Blackhall Place.

Focus Ireland is a national charity working with families, children and young people who are homeless, or at risk of homelessness, providing access to information, housing, childcare and a range of education services. In 2018, Focus Ireland provided support to over 15,500 people.

If you would like to sponsor Jerome’s participation in the Sleep-out, you can contribute here.

JWOD appoints Ciara Lehane as newest solicitor on litigation team

We are delighted to announce that we have appointed Ciara Lehane as solicitor on the litigation team at JW O’Donovan. This new appointment comes as the firm experiences increased activity in defence litigation among our corporate clients.

Ciara joins our Litigation department, after spending three years practicing in the area of defence litigation at a leading Dublin firm. Ciara specialises in civil litigation and has significant experience dealing with the conduct of defence litigation on behalf of insurance companies in the areas of motor liability, employers’ liability, public liability and defamation actions. She is a fluent Irish speaker and is enrolled on Clár na Gaeilge (a register of fluent Irish speaking solicitors maintained by the Law Society of Ireland).

Speaking about her new role, Ciara said: “I’m delighted to join JWOD, at a time when business in Cork city and the surrounding region is thriving. The area of defence litigation is fast-moving, and I look forward to the opportunity of working with the experienced team at JWOD and with their valued clients.”

Welcoming Ciara to the team, Jerome O’Sullivan, Managing Partner of JWOD said: “As we continue to see growth in our litigation practice, it is a pleasure to welcome Ciara to the JWOD team. Ciara brings with her specialist knowledge in the area of defence litigation, which will be of considerable benefit to both our team and clients”.