What is the effect of the transfer pricing regime?
Where "provision" is made between 2 related parties, by transactions which are not at arm's length and it creates a potential advantage for UK taxation then income profits or losses must be adjusted to reflect ehat the prices would be if they had been negotiated at arm's length (in the open market).
s28AA ICTA 1998
For the purposes of the transfer pricing regime - what is a "related party"?
If one company controls the other or they are under common control - control = voting power of > 50% (although sometimes can be as little as 40%), e.g includes joint ventures.
Control does not have to be direct
How is the transfer pricing regime effected?
Through self-assessment: the company must make any necessary adjustment to put connected party transactions onto an arm's length basis in its tax return.
An incorrect return can be penalised if made fraudulently or negligently.
Name three things a legal due diligence investigation should establish about the target company in a share acquisition
Name one thing that it would not be necessary to check
1. Whether the seller has good title to the shares in the target company
2. Whether there are any change of control clauses in the key commercial contracts
3. Whether the target company has guaranteed any obligations of other members of the group
It would not be necessary to check for restrictions on assignment of key commercial contracts - this would be necessary for an asset acquisition
To decide whether the seller has good title to shares in a target company, the buyer can rely on the list of shareholders in the annual return last filed at Companies House.
True or False
Accuracy of target's register is not guaranteed because it is compiled by the company itself and the information is only accurate at the day of filing.
You need to compare this information against the company's statutory books
What is commercial due diligence and who does it?
Ascertains things such as the market position of the target and a competitor analysis.
Usually done by the senior manager of the buyer and its business advisors
What is financial due diligence and who does it?
Covers things such as the achievability of the target's financial projections, analysis of the market in which the target operates and description of main customers, details of pricing policy, terms of trade, management structure, service contracts including remuneration, number of employees, taxation, profitability, balance sheet strength, accounting system and policies, premises.
It may be used as a lever for lowering price.
This will be done by the buuyer's accountants
What is legal due diligence and who does it?
Covers terms on which target does business and terms of employment of key personnel etc.
Carried out by the buyer's legal advisors.
What is a data room and what is it used for?
Way to limit the amount of information disclosed to the potential buyer and to ensure that the information is provided in a controlled manner.
How do you do due diligence on intellectual property rights?
- Ensure that the development trail can be traced.
- In the UK when someone develops something within the course of their employment, the IP rights generally go to the employer unless the employment contract states otherwise.
- Where a consultant develops technology they have the IP rights unless the consultancy agreement states otherwise.
- Employee contracts
- Consultancy agreements
If office premises are important to you and you find out that the lease will shortly expire, name two things you could do
1. Suggest a renegotiation of the price payable due to the cost and trouble of redetermining the lease
2. Suggest that the target could extend the lease prior to completion
How do you find out the extent to which a target company has charged its assets?
You search the register at companies house and the register of charges kept by target ltd.
The procedure for releasing charges will be found in the loan document itself
Which is done first, financial or legal due diligence?
Are letters of intent usually legally binding
No - except for the terms on exclusivility, confidentiality, costs and governing law.
Normally, the proposed terms are conditional on satisfactory due diligence results
Is legal due diligence done before the negotiation of the draft sale and purchase agreement?
Usually at about the same time - legal due diligence issues will be dealt with by contractual protections in the sale and purchase agreement if necessary
Before starting due diligence, name two things that the buyer's solicitor should agree with their client in relation to the scope of the investigation
1. the buyer's main purpose for the acquisition and any areas of particular concern it has identified
2. any limitations on the time frame for completion of the transaction and fees the client is willing to commit to the process.
What is the main purpose of (legal) due diligence
To identify areas in need of contractual protection (warranties)
What is the point of general company information in a preliminary due diligence report?
So you know exactly what you are buying/to avoid fraud