|
Less red tape will make deal-making
easier
30 July 2008
New laws designed to cut red tape and the costs of M&A deals
could be good news for entrepreneurs looking to buy or sell shares
in businesses.
New legislation, which is due to come into force in October
2008, will do away with a process called ‘financial assistance’,
which provides assurance to creditors where companies borrow and
grant security as part of the acquisition process. The law was
originally designed to give protection to creditors and also gave
comfort to banks and institutions lending significant funds to
buy-out teams involved in acquiring company shares. In reality, the
law proved onerous and tended to add cost and time to the
acquisition process.
While there has been debate about the potential impact the
removal of this safeguard will have on the M&A market,
soundings from the banking community are optimistic.
While this change in legislation has crept onto the agenda
without much comment, we believe it will have a generally positive
impact on deal activity, reducing the administration and costs
involved in merger and acquisition work. Deal flow is reduced at
the moment, given the continuing insecurity in global markets, and
any move to encourage acquisitions in the present climate should be
welcomed.
While the abolition of the financial assistance rules is broadly
welcomed by financiers and the professional services community
alike, we are aware that lenders involved in deals have considered
whether to have some form of additional due diligence on
acquisitions carried out after October 2008 to cover off potential
risk. Put simply, banks need to be sure that the forecasts and
predicted growth figures being put forward by potential acquirers
are ‘real’. The financial assistance process (which involved
directors giving a solvency confirmation) gave some comfort here.
We are not aware that the banks will require any specific new
requirements to be put in place post October 2008 to test the
strength of forecasts, but we may see an increased level of due
diligence into these after this date.
Obviously, we continue to face a period of relatively low deal
activity, as lenders remain cautious and sources of funds become
scarcer. Despite this sobering atmosphere in capital markets, the
abolition of financial assistance will no doubt act as a lubricant
to ease the wheels of M&A activity back into action.
For more information or advice, please contact Paul Ray, Nick
Mackenzie or Sushil Kuner.
The content of this bulletin is provided for
the purposes of general interest and information. It contains only
brief summaries of aspects of the subject matter and does not
provide comprehensive statements of the law. It does not constitute
legal advice and does not provide a substitute for it.