Dispute resolution and ADR (sellers & buyers)

ADR means Alternative Dispute Resolution. The idea here is that some form of “alternative” process is adopted that is likely to work effectively and be acceptable to more people but (fundamentally) seeks to avoid the conventional process of issuing claims, threats, demands etc.

Litigation is the term used by lawyers for what amounts to legal “fisticuffs” and the whole idea is to avoid conventional litigation. The route offered by ADR should be quicker and cheaper than litigation and a leading case makes it plain that, if you go to court now and win, if you haven’t at least tried ADR as a method of resolving the dispute, you may not get all of your legal costs (or indeed any of them) from the other side, even if you win.

You can’t afford to ignore this! Most well worded agreements for commercial deals will have a form of Alternative Dispute Resolution clause built in.

The Value of Professional Advice (sellers & buyers)

If you think that information is expensive, try ignorance.  Nobody pretends that proper advice is not expensive but it should also be invaluable.  When you take proper advice, do please rely on it.

Lawyers have a bad reputation and are described in many different ways, ranging from bloodsucking leeches to even less savoury terms! The main problem areas that can lead to a failure or breakdown of the relationship will be price and definition of role. This will invariably flow from a misunderstanding or false assumption (Aha!!).

“…a little knowledge is a dangerous thing.”

“…all the knowledge in the world is of no use to fools…” © the Eagles 2008

“I thought you were going to deal with that” – who’s doing what? (sellers & buyers)

Never assume (Doh!), spell it out.

Typical problem areas where misunderstandings usually occur between clients and their lawyers are:

  • Who’s preparing Heads of Terms
  • Fees
  • Assumption (Oh, come on!!) that the job will be “straightforward”. If there is a transaction and a business is being sold, then there will be 2 parties and 2 sets of lawyers. Your own lawyer can only provide an estimate based on assumptions about how the deal is likely to progress and how keenly various points may be debated. This is why we always revisit any fee proposal when the draft Heads of Terms are available, as this is the first occasion when the basis of the deal is known with all its variables, all of which are relevant to defining what the job is.

The approach and attitude of “the other side” is largely out of your hands as well as ours and so unless a fixed fee has been agreed, this WILL affect fees.

Fees (sellers & buyers)

Fees are normally charged based on time spent or anticipation of the amount of time. There should be a written estimate or fee proposal that clearly sets out the basis of charging for the “job”, sets out what the “job” is and how this and the likely cost may change.

There is no excuse for a poor estimate or one that is misleading. However, it helps to have an understanding of the difficulties that your lawyer may face in putting a fee proposal together for a job that hasn’t yet got under way or really been “pinned down” yet.

Disclosure Letter (sellers & buyers)

If in doubt, disclose.

Most agreements for the sale of a business (assets) or a company (shares) will contain a vast collection of warranties. These are statements/assurances about the business or the company and are intended to reassure the buyer that everything about the business is satisfactory and in “good order”. These warranties are normally broken down into headings such as “premises”, “employment” and “litigation”.

It is most unlikely that any seller of a business or company will be able to give these warranties/assurances without some form of qualification and the Disclosure Letter is normally where this “qualification” is set out. The letter is in 2 parts and the first part consists of “general” disclosures about the background information and details that the buyer is deemed to be aware of (e.g. information in the public domain); the second part contains the “meat” of the letter and the lists the specific disclosures to be made against the individual warranties and will refer to the precise clause or paragraph reference in the main sale agreement.

For example, if the warranties say that there are no employment claims known to you and you have (for example) just received a letter of proposed claim, then you would make a disclosure of this.

If in doubt, disclose.

The Disclosure Letter is normally signed by the Seller but may also be signed by his or her lawyers under some circumstances. It is normally given at completion and so will be dated on the Completion date. If there is a “gap” between exchange of contracts and completion, it is likely that the buyer will require a second disclosure letter to be given at completion or for the agreement to provide that the warranties are deemed to be repeated at completion and for any discrepancies to be flagged up for the buyer to vet and approve.

 This is one reason why most commercial deals go straight to exchange and completion on the same day with no “gap”.

Never knowingly volunteer anything

(Also known as “play your cards close to your chest”.)

This is basic stuff but very important nevertheless. The rules of haggling are simple but unforgiving. You wouldn’t say in a claim situation “I’m suing you for £5,000 but will happily accept £300”. You know that you’d be prepared to accept less than the sum claimed but it would normally be plain daft to say this. So don’t. There may be technical and tactical reasons to put such offers but that is another thing altogether and will need careful advice and strategy. This can often lead to a very delicate balancing act between “never knowingly volunteer anything” and “if in doubt, disclose). You will need good, solid and well-considered advice and this is a potential minefield. Tread carefully.

Why most deals go straight to exchange and complete at the same time with no “gap”. (sellers & buyers)

Any reasonably cautious buyer will be very keen to make sure that the business or company that he or she’s agreed to buy (at exchange of contracts the agreement becomes binding) does not deteriorate during the “gap” between exchange and completion. So the buyer will want to add a series of “dos” and “don’ts” into the contract to regulate how the business is run and provide for what must happen and what must not.

This will make it very difficult (at best) for a seller to run the business and he or she will find it possibly intimidating to have the buyer breathing down his or her neck. If you then throw in the other “maverick” factor of informing the staff about the deal and consulting not just with the seller but also the buyer, you will understand why most sales go forward and avoid this problem altogether.

In some cases, however, it’s just not possible to avoid the problem and this is normally the case when the agreement makes the whole deal conditional on something happening e.g. a particular consent or approval for the buyer to run the business.

But ask the question anyway…

Tax Deed (sellers)

This is part of the main agreement for the sale or purchase of shares (normally abbreviated to SPA). In short, the buyer will have carried out due diligence on the company to be bought, being very much aware that a company changes hands “warts and all”. The due diligence will have revealed the status quo in terms of what tax and other liabilities the company has. The purpose of the tax deed is to draw a line in the sand in terms of who will be and remain liable to pay what. Anything provided for in the last accounts is specifically excluded from this deed but, apart from this, whilst the buyer will be liable (or indeed the target company) for all tax from the company’s day to day “normal” trading activities, anything “unusual” should be covered by this deed. It will be a deed of indemnity from the sellers to the buyer in respect of any such liability.

The Accountant’s Role (sellers & buyers)

As with any professional in a commercial deal, the role will depend on who is giving the instructions (who is paying for it) and what those instructions are. Accordingly, this sort of thing needs to be picked up early on and, ideally, any points agreed should be set out in the Heads of Terms.

For example, if a company is being sold, there will be an accountant (or auditor) acting for the company. The first point to establish is whether that accountant will effectively also act for the sellers (as individuals) or if there is another accountant acting in that capacity.

Then you need to ask if you, as the buyer, want the accountant for the company to stay on. You may prefer to have your own accountant take over the role from completion.

Let’s take things back to basics here (and remember why you need to do this!), ask the following questions:

  • Who is doing what?
  • For whom?

The answers should then be absolutely clear. If not, then you need to ask the questions again!

Other Professionals (sellers & buyers)

This will depend on what the deal is and what complications may exist. There may be a property involved, requiring a survey and other services from a surveyor and valuer. If bank funding is involved, then a surveyor may need to be appointed to represent the bank and, as buyer, you may need to ask early on if the same person can act both for you and the bank to save time and fees. This may not be entirely straightforward and so it is sensible to start asking questions on this point at an early stage.

If buying a company, the buyer will need an accountant to help with the due diligence process on tax and accounts queries.

If there is a pension scheme involved, this may require help from an actuary but will depend on the size and complexity of the scheme.

 There may be an IFA involvement (Independent Financial Adviser) if a new policy of life assurance is needed or critical illness cover or if an existing policy or policies are being “re-used”.

Part Five will follow in the near future. In the meantime if the Commercial Property Team can help you please email them on guildford@rhw.co.uk or call 01483 302000