Legal and regulatory considerations for acquisitions: A non-lawyer’s perspective

A thorough examination of the target company’s corporate structure is essential to understand its legal and operational framework. This includes verifying the ownership of shares, identifying all shareholders, and mapping out any subsidiary or affiliate relationships. Reviewing documents – such as the Articles of Association and Shareholders Agreement – helps to uncover any restrictions on share transfers, pre-emption rights, or governance provisions that could impact a potential transaction, and ensures clarity as to who controls the business and how decisions are made, which is critical for assessing both risk and value. 

Legal due diligence = asking tough questions now rather than finding expensive answers later.  

As with FDD, legal due diligence should be conducted prior to finalising the terms of the transaction to ensure that the acquirer fully understands the risks they will assume.

For many companies, a few contracts form the backbone of commercial operations; therefore, the terms – such as change of control clauses – can significantly influence the viability of a transaction.  

A detailed review of key agreements with suppliers, customers, and strategic partners is necessary to spot concerns, for instance, termination rights or automatic renegotiation provisions. Additionally, restrictive covenants – such as exclusivity, non-compete, or non-solicitation clauses – should be assessed for their potential to limit future business flexibility or create post-acquisition liabilities. 

Understanding the target’s employment landscape is vital, particularly in transactions involving the transfer of staff.  

Legal advisers should review typical employment contracts and any staff handbooks or policies. Special attention should be paid to compliance with the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), which may apply when a business or part of it is transferred. TUPE safeguards employees’ rights, and non-compliance may expose an acquiring party to considerable legal and financial liabilities. 

Intellectual property (“IP”) assets often represent a significant portion of a company’s value, especially in technology-driven or brand-centric businesses. Due diligence involves verifying the ownership and legal status of both registered and unregistered intellectual property, such as trademarks, patents, copyrights, and domain names, and also requires identifying any licensing agreements, encumbrances, or ongoing disputes that may impact the buyer’s ability to utilise these assets after the acquisition.  

Clear title and freedom to operate are key to unlocking the full value of the IP. 

A comprehensive review of the target’s legal and regulatory compliance history is crucial to uncover any hidden liabilities. This includes identifying past, pending, or threatened litigation, regulatory investigations, or enforcement actions. It also involves assessing the company’s internal compliance systems and any breaches of laws or industry standards, such as anti-bribery, data protection, or environmental regulations.  

Understanding these risks allows an acquirer to negotiate appropriate warranties, indemnities, or price adjustments to mitigate exposure. 

In a share purchase, the buyer acquires the shares of the target company, taking ownership of the entire legal entity. This includes all assets, liabilities, contracts, employees, and obligations – whether known or unknown. The inheritance of all liabilities (including contingent and undisclosed) emphasises the need for diligence and investigation. 

Pros: 

• Continuity: Business operations, contracts, and relationships remain largely unaffected. 

• Simplicity for third parties: No need to reassign contracts, leases, or licenses. 

• Tax efficiency: Usually more favourable for sellers due to capital gains treatment. 

Cons: 

• Risk exposure: The acquirer assumes all liabilities – transparent or not. 

• Due diligence burden: Requires extensive legal, financial, and operational review. 

• Warranties and indemnities: Must be robustly negotiated to protect the acquirer. 

A share purchase is generally advantageous for sellers, as it allows a clean exit by transferring ownership of the entire company, including all assets and liabilities, making the completion a straightforward and final transaction from their perspective. 

For buyers, a share purchase is only preferable when the target company is well-managed and has minimal legacy risks. Since the buyer inherits all liabilities, it’s helpful when the company has a straightforward legal, financial, and operational history. Otherwise, the buyer may face unexpected exposures post-acquisition. 

In a trade and assets purchase, the buyer selects specific assets (e.g., equipment, IP, contracts) and may assume certain liabilities. The legal entity itself therefore remains with the seller. Due diligence is still important, as the specific assets and liabilities often require identification and valuation. Furthermore, third-party consents may be required for contracts, leases, and licenses. 

Pros: 

• Risk control: The acquirer can avoid unwanted liabilities and legacy issues. 

• Flexibility: Tailored acquisition of only the valuable parts of the business. 

• Tax benefits: The acquirer may benefit from asset depreciation or amortisation. 

Cons: 

• Complexity: Requires detailed documentation and asset-by-asset transfer. 

• Third-party consents: May delay or complicate the transaction. 

• Employee transfer: TUPE may apply, requiring careful handling of staff rights.

A trade and assets purchase would normally be favourable for buyers compared to sellers, particularly when the target business has legal, financial, or operational baggage. This structure allows the buyer to cherry-pick only the desirable assets and avoid unwanted liabilities, offering greater risk control. For sellers, liabilities and the need to manage the wind-down of the business remain. Trade and assets deals can therefore be more burdensome and involve additional tax liabilities for a seller and delay a simple farewell from the company as the company first has to account for corporation tax on the sale of the assets, then the shareholders need to address the personal income/ capital gains tax implications of extracting the residual cash from the company – often referred to as the “double tax” disadvantage of a trade sale.

The HOTs is a preliminary document which outlines the key commercial terms agreed between the buyer and seller before due diligence and detailed negotiations begin. Whilst not usually legally binding (except for confidentiality, costs and exclusivity clauses), this agreement is regarded as morally binding and sets the framework for the transaction and helps prevent misunderstandings later in the process; for example, the legally-binding purchase agreement will be drafted based on the HOTs – putting the onus on the disagreeing party to provide good reason for any changes down the line.  

The SPA is used in share acquisitions, while the APA is used in trade and asset deals. These are the principal legal contracts that formalise the sale, detailing the purchase price, payment terms, warranties, indemnities, and conditions for completion. They are heavily negotiated and tailored to reflect the structure and risks of the deal. 

Warranties are statements or assurances provided by the seller about the condition of the business or assets being sold – for example, confirming that accounts are accurate or no ongoing litigation cases exist. Indemnities, on the other hand, are contractual promises by the seller to compensate the buyer if specific losses or liabilities arise – often related to matters uncovered during due diligence or disclosed as exceptions to the warranties. 

The disclosure letter accompanies the SPA and allows the seller to disclose exceptions to the warranties given in the agreement. It serves to limit the seller’s liability by identifying known issues, such as ongoing disputes or unusual contractual terms, and is a critical tool for managing the seller’s post-completion risk. 

Internal company documents are necessary to confirm approvals and authorise the transaction. Such documents ensure the deal is legally valid and enforceable under company law.

In asset purchases, where employees are transferring under TUPE, specific documentation is required to inform and consult with staff, and to formalise the transfer of employment contracts. These documents help ensure compliance with employment law and protect both parties from future claims; for example, both parties must inform and, where appropriate, consult affected employees or their representatives, as failure to comply can result in potential compensation claims.  

If the transaction involves transferring contracts, leases, or licenses, third-party consents may be needed. Assignment agreements or novation documents are used to legally transfer the corresponding rights and obligations to the acquirer, ensuring continuity of business operations.