If you require any further information on the items featured in this newsletter or indeed advice on any other commercial matter, please contact one of our commercial solicitors to the right.
In this issue of Commercial Write:
A Positive Outlook For The Year Ahead
It is now five years since the start of the financial crisis. Having gone through a doubledip, some commentators are talking up the prospect of a “triple-dip” and we continue to see negative news in the media with well-known high street retailers (HMV, Comet and Blockbusters to name a few) going into administration.
Despite all this doom and gloom, we have seen an upturn in transactional activity culminating in a number of deals closing late 2012 and early 2013.
There is no doubt that there are still difficult times ahead nationally and internationally – the rough sea of the economy will give many, irrespective of their size, a rough ride over the coming months and years. However, the commercial activity we have seen throughout our client base indicates to us that things are normalising and, dare we say, in certain sectors improving. Whether or not we think mention of green shoots is simply “spin-doctoring”, some sectors/industries have experienced positivegrowth, and not only recently, but throughout the financial crisis. We ourselves have been extremely busy with corporate transactions in our Corporate/Commercial department over the last 6-
At Neil Myerson LLP
As you can imagine, the last 5 years have seen businesses and individuals being more litigious as they have been keen to enforce or protect their commercial rights and interests. This has seen our Commercial Litigation department experience rapid growth. Similarly, after our Employment department supported clients through the initial surge of mass redundancies (mainly in the private sector), it continues to be busy now with contentious employment litigation, high value compromise agreements and transactional support work for the Corporate/Commercial department.
As predicted by the Property Partners, Richard Lloyd and Jeremy Lee, commercial property has turned from a relatively inactive market for sale and purchases to what is now a very active market. Investors and developers are now seeing opportunities tempting them back into the fray. Signs of a recovery…
In our Corporate/Commercial department, we managed to maintain the levels of work throughout the financial crisis and more recently we have seen an upturn in deals leading up to a rush of activity towards the end of 2012. We have also worked with clients who have flourished over the last 5 years by operating robust businesses grounded on sound business models. Some have done sufficiently well to allow them/their owners to exit. For example, we recently concluded the sale of Strand Technologies Limited and another technology-based company to overseas purchasers – these sales happened following solid sale performances by them. It hasn’t been all plain sailing over the last 5 years.
We have worked closely with many businesses who have found the period challenging to say the least. We have assisted with restructuring, re-financing and investment. We have also advised on the obligations and duties of directors and how these change on the onset of insolvency and, if their concerns are more terminal, we have worked with them on insolvency strategies, including pre-packs. The prediction of mass insolvencies, administrations and liquidations has not really come to fruition and the recent newsworthy additions to that list (HMV and Blockbusters) have been for reasons which have more to do with technological market changes than with the recession. Banks, to their credit, have been reluctant to pull the plug on many struggling business and have been looking to “manage” businesses that do not sit well in their portfolios off their books. This, on the one hand, contributes to the recession but, conversely, also provides potential opportunities for competitors, investors and business angels.
The range of the type of deals we have seen:
- cash exits where the buyer pays 100% of the consideration in cash on completion to exits with deferred consideration and/or earn-outs;
- mergers by way of an exchange of shares (exiting shareholders getting shares in the buyer) to mergers mixing shares with cash;
- private equity/investment deals with investors/business angels taking a shareholding in a company together with a refinancing package;
- facilities and loans from investors/business angels with adequate security;
- prepacks – appointing an administrator who then sells the assets back to the directors/shareholders or a new management team.
It was anticipated that most, if not all, deals after 2007 would be heavily purchaser-biased, leveraged with deferred consideration and/or earn-outs. Whilst they have been relatively purchaser-biased (perhaps “conservative” would be a better description), recent deals have shown exiting shareholders opting for the certainty of as much cash out as possible on completion rather than risking a greater amount through deferred consideration and/or earn-outs.
What do we hope to see in 2013?
Opportunities will continue to arise, some may be distress opportunities where deals need to be quickly done to help a struggling business and others will be more like what we grew used to just before the financial bubble that caused the recession. It will be some time before the Banks feel comfortable enough to be heavily involved in corporate activity. In the near future, it will not be like it was just before the recession, Banks will only be prepared to fund a deal where there are sensible cash flow projections and adequate security. However, we have seen businesses adapting to this lack of appetite shown by the Banks in structuring themselves in more robust ways and structuring deals/opportunities in ways that rely less on Bank financing. Further things we may see:
- wealthy individuals plugging the funding gap in certain sectors (e.g. technology);
- the rise of crowd funding;
- businesses turning to traditional asset backed lending, for example, invoice discounting/finance leases;
- a requirement for personal guarantees from director/shareholders becoming the norm.
From an acquirer’s perspective, there are now plenty of opportunities – whether picking up a complementary business or moving into a new sector. It is possible to negotiate deals to suit; there is no “norm” anymore. With what is being seen as an uncertain time ahead, potential acquirers are in pole position to strike a deal on their terms.
In the current economic climate, where access to development capital is scarce, participation in a joint venture can provide attractive commercial advantages. A joint venture can take a variety of forms but broadly involves any arrangement where two or more existing businesses agree to co-operate and combine resources to target a specific business project as an alternative to developing new business. Such a project is often a new enterprise, but a joint venture may also be aimed at enhancing the operation of an existing or complementary activity. A joint venture can also spread and dilute risk where the parties typically share the initial investment (including the contribution of finance and/or assets) and share any on-going liability of a project.
The co-operation between joint venture parties can be prompted by the fact that a new project requires more resources (money or otherwise) than each participant has available or is prepared to devote to the project on its own. For example:
(a) where a party is involved in the manufacture and marketing of high-tech products, research and development costs may be prohibitively high and so it may be expedient to find a trading partner to share the costs of this;
(b) a new project may carry a high degree of financial risk and a single party may be unwilling to bear this risk alone.
There may be other more specific reasons for collaboration. Typically, these may include:
(a) a business may wish to penetrate a foreign market with its goods or services by linking up with a business in that jurisdiction which has the local relationships and knowledge. The need to involve a local participant may also be in
response to a legal requirement of the state in question or in order to address cultural or other territorial requirements;
(b) a business may wish to accelerate expansion by sharing sales staff or sales channels;
(c) joint venture partners may wish to extend the reach of their businesses where they can tender for projects that are too large for their resource base;
(d) a joint venture may allow a business to tap into the resources and specialist skill-sets of another, for example this may include skills, equipment, technology or knowledge. A party may only possess some of the skills that are needed for a new project and so will be looking for a trading partner that can provide different complementary skills. This is often the case with the development and exploitation of intellectual property rights. One party may own the rights and another may have the facilities and resources to make and market the products;
(e) collaboration may enable the parties to maximise profits by combining manufacturing facilities enabling the parties to take advantage of economies of scale. When considering the commercial benefits to be derived from a joint venture, it may be appropriate to consider whether these potential advantages could be achieved by the merging of some or all of the respective parties business activities or one party taking over another. It is not unknown for the collaboration or a joint venture to provide companies (often larger companies) with the opportunity to assess the potential of smaller companies by working with them, with the aim of buying them out if the partnership is successful.
Form of Joint Venture and planning considerations
The structure used to conduct the joint venture will usually take the form of a private company, a limited liability partnership (LLP), a partnership or simply a contractual agreement between the parties.
Inevitably, a joint venture involves a sacrifice of the control and flexibility which otherwise may have applied had a party undertaken a business project independently. The various forms of joint venture reflect different degrees of integration of the interests of the parties in the joint venture. The use of a corporate entity involves the vesting of all the trading activities relating to the joint venture business in that corporate entity. On the other hand, where the joint venture is purely contractual, the parties remain as independent contractors. In these circumstances, there may well be no pooling of assets and no general sharing of revenues and costs. This type of agreement is often referred to as a co-operation agreement. Such a contractual arrangement would suit circumstances where the parties decide to retain their own independence.
The advantages of a private company, including limited liability and the separation of management (directors) and ownership (shareholders), are such that for most business joint ventures, this is commonly the most appropriate vehicle. For smaller operations, projects of a specific duration (e.g. construction projects), a contractual structure is often used. For ventures in which a number of individuals actively participate, a partnership or an LLP may be appropriate.
When planning the structure of a joint venture, there are a number of issues to be considered. These include for example, identifying the underlying objectives of the parties, the period of time during which it is intended the joint venture will operate, the physical location of the operation, the extraction and pooling of profits, the resources that each party will commit, requirements for employees, decisionmaking, accounting considerations and regulatory (e.g. competition) issues. The parties will also need to consider whether the structure chosen for the joint venture provides the best tax treatment for each of them as well as for the joint venture itself.
If a party to the joint venture is contributing intellectual property and/or specialist knowledge and technologies, then thought will need to be given at the outset as to the protection of such rights or confidential information. Clarification will be needed as to who owns the intellectual property rights contributed to the joint venture. Usually, the party that owns the intellectual property rights will licence such rights to the joint venture vehicle on the basis that such rights are only to be used for the purpose of the joint venture. Further issues arise as to who owns the rights generated by the joint venture itself, permissions as to its exploitation and what happens to this property when the joint venture is dissolved.
Planning a clear exit strategy from the outset is advisable. If the joint venture makes good progress, it can always be extended or modified. In some cases, the joint venture may have a specific purpose or goal and once this is achieved, the legal documentation can provide for the joint venture to be wound up or sold.
If the joint venture does not go as planned, a clear exit strategy can help ensure minimum financial and credibility damage. In the case of corporate joint ventures, this can be achieved by the inclusion of a “deadlock” clause in the joint venture agreement, whereby in the event of a dispute or disagreement, either party could buy out the other, the joint venture could be sold, the matter could be referred to arbitration or the joint venture could be put into liquidation.
Due to the variety and complexity of the issues which need to be considered when planning a joint venture, it is important to get specialist legal and accounting advice at an early stage. The corporate and commercial team at Neil Myerson LLP have a wealth of experience of advising clients on a wide variety of joint ventures, including international and nationally based organisations, as well as small and mediumsized businesses. If an overseas joint venture is planned, Neil Myerson LLP has well- developed international connections through its membership of MSI Global Alliance which is one of the worlds leading associations of 250 independent legal and accounting firms covering 105 countries worldwide.