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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.

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