In recent years, there has been an increasing trend of manufacturing businesses being sold due to an unexpected offer by a buyer, often as a trade sale to a competitor, but also in the context of private equity.
This can create a dilemma for sellers, who on the one hand have an offer that is too good to refuse, but on the other have a company that is not ready for a sale.
The lack of readiness can often result in delays, unexpected increases in professional costs, greater liability arising from the transaction documents and fundamentally a reduction in the sale price.
The sale of a manufacturing company is a complex transaction which will generally take several months or more to complete.
For many sellers, this will be the largest and most important transaction that they are involved in, allowing them to realise the company’s value which has been built up throughout the years.
A fundamental step in the transaction will be the due diligence carried out by the buyer, which will begin at the start of the transaction.
Due diligence is the process where the prospective buyer gathers and reviews information about a company.
At the start of a transaction, a seller will often be faced with an extensive list of questions covering all aspects of the business, which can be time-consuming, particularly if the company is not packaged for sale.
Maintenance of a company's statutory registers
One area that is often overlooked and can pose an issue during due diligence is the maintenance of a company's statutory registers.
Whilst the requirement to keep statutory registers up to date may not seem vital, it is a legal requirement pursuant to the Companies Act 2006. It is also an offence by the officers of the company to fail to keep the registers up to date.
A prospective buyer will need to review the statutory registers to ascertain who the company's registered shareholders are, as the register of members is the only conclusive record of ownership.
If the company's register of members has not been correctly maintained, then this can raise issues relating to title to the shares and, therefore, a shareholder's ability to sell them.
There are also often issues with the allotment of shares or incorrectly carried out transactions (such as share buy-backs), which can result in shares being in issues that are not intended to be. This can cause delays to the sale transaction whilst such issues are resolved.
Therefore, it would be beneficial to undertake your internal audit before initiating the process of engaging with prospective buyers.
What are statutory registers?
All companies are legally required to keep and maintain up-to-date statutory registers under the Companies Act 2006.
A company must keep the following registers:
- A register of directors and secretary (the company must also keep a separate register of its directors' residential addresses, which will not be available for public inspection).
- A register of members
- A register of charges created before 6 April 2013
- A register of persons with significant control
What information does each register need to contain?
Register of directors and secretary
The register of directors and secretaries must contain specific information about each officer of the company, including:
- Service address
- Date of birth
If the service address for the director or secretary recorded is different to the relevant officer's residential address, this should also be recorded.
Register of members
The most vital register, specifically in a sale transaction, is the register of members.
It is this register that provides the evidence of who the members of the company are and in what proportion the shares are held.
The register must contain:
- The member's name and address.
- The date on which the member was registered as a member.
- The date on which the member ceased to be a member.
- The number and class of shares held by the member.
- The amount paid or agreed to be considered as paid on the member's shares.
Register of charges
Whilst charges created after 6 April 2013 are no longer required to be recorded in the statutory registers, any charges predating this remain subject to the requirements set out in the Companies Act 2006, and a record must be kept in the statutory registers.
Register of persons with significant control
Following its introduction in 2016, companies must identify those persons or entities which hold significant control over the company and keep a register detailing the nature and extent of the control held over the company.
What if the statutory registers cannot be found or are incorrect?
If, following a review of your statutory registers, they contain incorrect or outdated information, Myerson can assist in carrying out a rectification exercise.
Alternatively, suppose the statutory registers cannot be located.
In that case, Myerson, working with you, can reconstitute the statutory registers to ensure that at the time of sale, the statutory registers correctly reflect the company's position.
What effect can incorrect statutory registers have on a transaction?
If issues are found with the company's statutory registers during the transaction, this can have wide-ranging implications on the transaction, ranging from time delays, tax issues, indemnities being requested, a reduction in the purchase price or even a potential buyer pulling out of the transaction.