Corporate Finance FAQs

VIMBO

One type of sale that we are seeing now more than ever is the so called VIMBO. In this form of management buy-out, the sellers of the business essentially sell to existing management over a period of time (which could be up to 7 or 8 years or longer). The sellers will take some of the consideration up front but leave the rest to be paid over time. The company essentially self-funds the sale over this period.

Third party debt funding may or may not be a feature of a VIMBO but the buyers will usually be required to put down some of their own cash. The sellers meanwhile will retain an interest (ordinary shares and preference shares/loan note instrument) which allows them to exercise a level of control in the business in order to protect their deferred consideration.

Some of the advantages of a VIMBO for sellers are:

• The chance to realise more than a trade buyer might pay for the business.
• The lack of substantial warranties and indemnity.
• The ability to continue to influence the business and ensure an effective handover of control to management.
• The ability to benefit from the available tax reliefs

Not all businesses will suit this model though. In order to make a successful VIMBO there needs to be (as a minimum):

• Suitable management in place to take over the business.
• A good level of trust between the sellers and the managers buying the business.
• A good level of cash (and projected profit) within the business to sustain and fund the sale over the projected period.

Where these circumstances align, a VIMBO can be a very convenient way for business owners to sell their business in the absence of cash rich trade purchasers knocking down their door.

Why should I update my company's articles for Companies Act 2006?

The main reasons for updating the articles of a limited company formed before 1 October 2009 are:

• To take advantage of changes made by the Companies Act 2006 (the “Act”).
• To delete redundant provisions and outdated references to previous Companies Acts.
• To avoid the risk of inconsistencies arising between the articles and the Act (in which case the Act will usually prevail).

In the case of group companies, putting in place similar articles across a number of subsidiaries may also have significant administrative advantages.

Most of the provisions that were in the memorandum of association of such companies are now deemed to be provisions of the articles under the Act. We would therefore suggest that the opportunity is taken to update the articles to include provisions of the memorandum which are to be retained. For example, the statement that the liability of members is limited should always be retained, whereas it may make sense to dispense with the objects clause (except in the case of charitable companies).

Regulations made under the Act have introduced new forms of model articles of association for the three most common types of companies, namely:

• Private companies limited by shares.
• Private companies limited by guarantee.
• Public companies.

The general approach taken with the model articles was to avoid duplicating provisions of the Act, particularly in relation to resolutions and meetings of members, and so a certain level of knowledge of the Act is assumed.

The model articles for private companies limited by shares were drafted with “small, owner-managed companies in mind” and only intended to cover matters relevant to the majority of such companies. As such, a number of assumptions were made in these articles (for example, that the company will not wish to appoint a secretary or alternate directors, and will not wish to issue partly paid shares) which may or may not be relevant.

What is the difference between a Scottish partnership and a Scottish limited partnership?

Why would I set up a Scottish limited partnership? And how?

A partnership (or “firm”) is formed by two or more persons carrying on a business in common with a view of profit. The Partnership Act 1890, which still applies today, provides that a Scottish firm has separate legal personality from its partners, enabling it to enter into contracts and hold property in its own name. However, it should be noted that the partners of the firm are personally liable for the debts of the firm.

The Limited Partnership Act 1907 extended the 1890 Act, allowing for the registration of limited partnerships. A limited partnership is a firm in which one or more partners are general partners (who manage the firm and have unlimited liability) and one or more partners are limited partners (who are not involved in the management of the firm and have limited liability).

Partnerships and limited partnerships are treated as transparent for UK tax purposes by HM Revenue & Customs.

Like a Scottish firm, a Scottish limited partnership has separate legal personality from its partners. The fact that a Scottish limited partnership offers a combination of limited liability (for its limited partners), tax transparency and separate legal personality has made it suitable for some specialised purposes:

• In funds structures, as the main fund vehicle or as a carried interest partner (by means of which the fund manager receives a proportion of the profits of the main fund).
• As an intermediate holding entity in a group for tax planning purposes.
• As a member of Lloyd’s (LLPs can now also be members of Lloyd’s too).
• To set up a Scottish limited partnership, a form LP5 must be filed with the Registrar of Limited Partnerships at Companies House in Edinburgh. As there can be difficulties relying on the statutory scheme, a limited partnership agreement should be put in place. This is a private agreement that will be confidential to the partners.

What are earn-outs?

An earn-out is a seemingly straight forward idea and is an arrangement for the purchase of a company or a business where payment of at least part of the purchase price is deferred and calculated by reference to the future performance of the company or business being acquired. Earn-outs are often used as a management incentive where owner-managed businesses are sold and the managers continue to work for the business following the sale. They are also commonly used where the business being bought is fairly new but has significant growth potential. They are also commonly used to bridge a “price gap” between the seller and the buyer.

How are earn-outs calculated?

Most commonly, earn-outs are calculated with reference to profits but it is also possible to calculate earn-outs with reference to turnover, net assets or, depending on the nature of the acquisition, any other appropriate financial measure.

What are the main advantages of earn-outs?

• The earn-out can be used as a way of financing the purchase because payment of part of the purchase price is deferred. This will also benefit cash-flow.
• The company or business being purchased can be valued on actual future performance which is more accurate than it being valued on past performance or predictions of future performance, which can be uncertain.
• Potential risks to performance are shared with the seller.

Some advantages for the seller include:

• The seller may receive more price if the business being sold experiences fast growth. Without the earn-out, the buyer may wish to pay a more discounted price due to uncertainties over the future profitability of the business being acquired. In short, by using an earn-out, the total purchase price may be greater (provided the financial targets are ultimately met, of course).
• If the buyer is part of a larger group, the seller’s business may make use of additional resources, finances and trading advantages, allowing the seller to unlock value that would not have been realised otherwise.

What are the main disadvantages of earn-outs?

Generally, there is potential for a number of conflicts during the earn-out period as both parties may disagree as to how best to maximise profits. Earn-outs are open to manipulation by the buyer or the seller (if they remain in day to day control post-acquisition).

Some disadvantages for the buyer include:

• Usually the seller will seek to contractually provide that the buyer’s control of the business may be restricted post-acquisition, particularly if the seller remains in day to day management of the business – this is principally to avoid unfair manipulation of future potential value of the earn-out but also to allow the seller to optimise his ability to earn the earn-out. For example, the ability of the buyer to make material changes to the business is usually restricted for the duration of the earn-out period so as to ensure (as much as possible) targets are reached.
• For the same reason, the buyer is often unlikely to be able to resell the business being bought until the earn-out period has expired without triggering an early payment of the earn-out.
• Although earn-outs should encourage management to maximise profits, sellers (if they remain in day to day control, post acquisition) may attempt to do this through short term measures to the detriment of the long-term success of the business being acquired.

Some disadvantages for the seller include:

• A clean break from the business being sold is usually not desirable for the seller who will wish to “stay on” and oversee trading during the earn-out period.
• The seller risks receiving less money than originally anticipated especially if there is a downturn in the performance of the business.
  there are the inherent risks of agreeing to any form of deferred consideration: will the buyer have the resources to pay the earn-out even if it is earned? The seller would be wise to consider some form of “security” for performance.
• Unless contractual protection is sought (as discussed above), a seller’s interest in the earn-out could be unfairly prejudiced by a buyer.
  When entering into discussions that involve a sale with a material earn-out element of price, both seller and buyer would be advised to raise “control” issues early so that these can be considered carefully before signing off on heads of terms.

Company Secretary: Main Issues To Consider

What is a company secretary?
The company secretary is an officer of the company and is, most commonly, the person tasked with ensuring the operation and organisation of company activities. Depending upon the type of business conducted by the company, the work of the company secretary will vary.

Who can be a company secretary?
The company secretary can be an individual or it can be a body corporate, for instance, another company.

Does a company secretary require any formal qualifications?
No formal qualifications are needed to be the company secretary of a private company. For public companies, however, the directors of the company must ensure that the secretary has the necessary knowledge and experience to fulfil the role of secretary, and has one of the qualifications set out by the Companies Act 2006.

What are the duties of a company secretary and what can a company secretary be liable for?
Unlike for directors, the companies legislation does not set out any statutory duties for the company secretary, however, many duties are implied by reason of the company secretary being an officer of the company. Please note however that, as an officer of the company, the secretary may be liable for any breaches of various provisions of the companies legislation.

Does my company need a company secretary?
It depends. Public companies are required to have a company secretary. If, however, your company is a private company, a company secretary is only required if the articles of association (the rules of the company) expressly require a secretary (NB it would be possible to amend the articles so as to remove any specific reference to the company having a secretary but there would be no need to amend the articles if they only refer to the duties of the secretary).Nevertheless, a private company that chooses not to have a company secretary should consider ensuring that another party has the task of carrying out the role and functions of company secretary.

What are the legal responsibilities of a company secretary?
As we say above, there are no statutory prescribed responsibilities which relate specifically to the role of secretary.

What is the role of a company secretary?
This will vary greatly from company to company and certainly between public and private companies. In many small private companies, a company secretary will have only a very limited role; more or less simply occupying the office. In large private companies and certainly large public companies, the role of company secretary would traditionally include the following tasks:

• ensuring that directors are correctly appointed
• giving practical support and guidance to directors
• convening board meetings
• keeping minutes of board meetings
• ensuring the is board aware of matters that may require its attention
• ensuring that records are kept up to date
• ensuring compliance with relevant regulations and laws
• making sure that the business interests of the company are accounted for
• ensuring that decisions of the board are properly carried out
• giving advice on matters of ethics and good governance
• communicating regularly with shareholders
• convening shareholder meetings
• keeping minutes of shareholder meetings
• ensuring the best interests of the shareholders are taken into account
• acting as a main point of contact for shareholders especially with regard to governance of the company.