FAQs

Decide what you want out of the process and surround yourself with people who will help you get there. Every set of circumstances is different and different sellers will have different motivations and aims when approaching the deal process – but in every circumstance a seller is best-served by approaching the exercise with some key points in mind.

Preparing for sale

In virtually all business sale scenarios, the buying party will undertake a so-called due diligence (‘DD’) investigation into the target business, by means of appointing a number of advisors (notably accountants and lawyers) to investigate the business. The exercise generally investigates every aspect of the business, from shareholdings to litigation, customers to employees, accounts and finance to taxation.

DD can be a time-consuming, invasive, and at times frustratingly repetitive process, but it informs every buyer’s view of the target business, and a company passing through a DD process with a clean bill of health will have paved the way for a smooth transaction process, minimising the risk of a buyer attempting to negotiate a price reduction into the deal or to insist on onerous risk-allocation provisions in the legal documents.

For all these reasons, undertaking your own DD exercise prior to getting into a deal process can be hugely advantageous. It involves some investment prior to the deal process, but this can be repaid in spades in enshrining value in the negotiation with the buyer.

Finding a buyer

Not exclusively, but most sales are made either to ‘trade’ or to ‘PE’, meaning the buyer is either another business trading in a similar field, or a private equity investor looking to take a stake in a company to fund its expansion and a planned future sale.

Identifying a buyer may be as simple as negotiating a deal with a 3rd party who makes a direct approach. This is fairly common – particularly as regards trade sales, where buyer and seller may be aware of each other already. But more commonly, a seller will use the services of a corporate finance (‘CF’) advisor to market the business for sale.

A good CF advisor does far more than sent out a business summary to its community and wait for offers – but instead, will advise a seller on optimising value, likely buyers in the market, recent valuations on similar businesses to have sold – and will upon sourcing possible buyers, work closely with the seller to agree the best possible terms with the buyer.

Deal process

Your key advisors on a sale are your lawyer, and your CF advisor and/or accountant/tax advisor. The process is intense, consuming and stressful, and the role of our advisor is to take responsibility for the process as a whole, leaving you to make decisions in an orderly and calm manner as the process unfolds.

This takes us back to our opening comment above – surround yourself with good people who are experienced in navigating the process and (critically) who start and end with listening to what you want to achieve from the process.

Finding and keeping good staff is key to any successful business, but all the available evidence tells us this is getting harder and harder. Having the right people in the right place at the right time will maximise the value of a company. Enabling employees to share in the value that they create is a tried and tested way to recruit, motivate and retain them. So how do you do it?

Cash bonuses are a simple method, but are tax-inefficient (or, if you prefer, expensive) as they attract income tax at marginal rates and both employers’ and employees’ national insurance contributions. They also fail to carry any sense of ownership.

This is where employee share option schemes, and other share based incentives, come into their own. Properly constructed they can provide substantial and tax efficient rewards, and a feeling among staff that they are part of something greater than the day to day output of the business.

No matter what type of arrangement is used, there is great deal of flexibility in how they are set up. The majority are designed to allow employees a share of the sale proceeds of a business which is then taxed as a capital gain, rather than as income. Some will allow employees to have shares prior to any sale, so that they can be paid dividends or as a taster for a future management buy-out.

Participation in the arrangements can, and is often, made subject to performance targets being met – which can be linked to the financial performance of the business and/or individual employees, or anything else that can be objectively tested.

What type of arrangements are there, and what is best? As ever, it depends. There are some qualifying rules in the tax legislation which may limit the availability of a particular arrangement for a particular business. What is best may depend on what a stage a business is at in its life-cycle.

There are a number of HMRC approved arrangements – for the majority of businesses the most suitable will be an Enterprise Management Incentive Scheme (commonly known as EMI) or, failing that, a Company Share Option Plan (CSOP). Rule changes coming into force in April 2023 are likely to make CSOPs a more attractive proposition than before.

And then there are a raft of arrangements which are not officially approved, but are accepted, by HMRC. These include unapproved share options and the award of growth shares which allow employees to share in the future increase in value of the business. The latter can also be used in an EMI scheme.

For most business that have fewer than 250 full-time equivalent employees and gross assets of no more than £30M (both of which are qualifying conditions) an EMI Scheme will fit the bill best. This can give certainty over tax treatment and as HMRC will agree a company valuation when the scheme is put into place the scope for later arguments is greatly reduced.

How does an EMI scheme work? Typically (but not exclusively) employees will be granted options over a number of shares (or a percentage shareholding) in a company, but those options can only be exercised when the company is being sold. At that point they get shares which they then sell to the buyer of the company. The profit they make is (at current rates) subject to capital gains tax at 20%, but this is reduced to 10% if they have had their options for 2 years or more. The company also gets a corporation tax deduction for their share-based profit, which should be reflected in a higher price paid by the buyer.

A shareholders’ agreement is a written agreement entered into between all or some of the shareholders in a company. It regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. They also govern the way in which the company is run.

Typical issues covered in a shareholder agreement include:-

• The management/running of the company including, removing, appointing, or paying directors.
• Document the shareholders’ protections, rights, and obligations.
• How the shares are to be owned, sold, transferred or new shares issued.
• Define how important decisions are to be made.
• Protect minority shareholders, those shareholders with 50% or majority shareholders.
• Payment of dividends.
• Dispute resolution procedures including deadlock provisions on a 50:50 company

The absence of a shareholders’ agreement opens up the potential for disputes and disagreements between the shareholders. If a dispute does surface, a properly drafted shareholders’ agreement has a mechanism in place to side-step litigation which carries the inevitable risk of time and money being re-directed away from the company and shareholders.

In the absence of a shareholders’ agreement a minority shareholder with 50% of the shares or fewer has little control over the company and can find themselves at the mercy of the majority shareholders who have the controlling interest. A well drafted shareholders’ agreement can redress the balance for the minority shareholder.

From a majority shareholder perspective, the shareholders’ agreement can provide the tools to help the majority shareholders remove an unhappy/nuisance/underperforming minority shareholder. Such mechanism can also force the sale of the minority shareholders shares, at an agreed or fair valuation, often called a “drag along” provision.

It is not uncommon for shareholders to operate a company on a 50/50 shareholder basis. If a dispute arises between those shareholders and a shareholders’ agreement is not in place, this can result in deadlock meaning that the company is not able to operate and may face potential liquidation.

Confidentiality can be critical to the company as well as the shareholders. A well drafted shareholder agreement can make provision for how the shareholders are bound by confidentiality.

As your company grows it is inevitable that investment may be required, or succession planning will need to be implemented. Any potential investors or buyers will expect to see a shareholders’ agreement is in place to show good governance and the company has been well run.

Very few shareholders believe that a dispute could ever happen to them. It is only when conflict arises those shareholders, whether they are minority shareholders, those in deadlock with 50% or majority shareholders discover that they should have entered into a shareholders’ agreement. If the financial predictions in the press are to be believed tough times are ahead and when that happens, conflict is not far away. If you are a shareholder without a shareholders’ agreement it is suggested that you put one in place – sooner rather than later.

If you are party to a construction contract and have not received payment of sums due to you, you may be able to suspend works under the contract.

Although there is no common law right for a party to suspend works, the Housing Grants, Construction and Regeneration Act 1996 (Construction Act) provides a statutory right for a party to suspend performance of its obligations under a construction contract in the event of non-payment.

This right is implied into every construction contract, even if the contract does not deal with the issue of suspension on the face of it.

Statutory right to suspend

Under the Construction Act, where the paying party has failed to make payment to the payee by the final date for payment, the payee has a statutory right to suspend performance of ‘any or all’ of its obligations owed to the party in default.

If you wish to exercise your statutory right in this respect, you must ask the following:

• Is my contract a ‘construction contract’? (If it is not, you will not have a statutory right to suspend under the Construction Act);
• Have I provided the party in default with at least seven days’ clear notice of the intention to suspend works? (This is a requirement under the Construction Act);
• Does my construction contract set final dates for payment? (If it does not, use the dates set out in the Scheme for Construction Contracts (England and Wales) Regulations 1998 – link;
• Do all of the works relate to “construction operations” as defined by Section 104 of the Construction Act? (Only works which are ‘construction operations’ can be suspended under the Construction Act);
• Has the final date for payment passed and is the sum still unpaid?

If you decide to exercise your statutory right to suspend under the Construction Act, it is crucial to remember that this right will end once the party in default pays the unpaid notified sum. It is also crucial to note that suspension under the Construction Act relates solely to non-payment and therefore cannot be used in response to a breach of contract other than non-payment.

Contractual right to suspend

If you wish to suspend works for other reasons, it is essential that you check your construction contract to see if there is a suspension clause. Such clauses often provide parties with a right to suspend for reasons other than non-payment.

If your construction contract does include a suspension clause, it is likely that this will outline the immediate consequences of suspension, how long a contract can be suspended for and what is to happen following the re-commencement of works after a suspension.

Consequences of suspension

Whether you suspend using the statutory rights provided by the Construction Act, or any contractual rights afforded to you by the contract, it is likely that you will also seek:

• An extension of time equivalent to any delay to the works caused by the suspension

• The additional costs associated with demobilisation and remobilisation

• Any preliminary type costs incurred during the period of suspension

The enforceability of an adjudicator’s decision can be challenged in the enforcement action itself, by defending the summary judgment application made by the claimant. For example, if the adjudicator lacked jurisdiction to decide the dispute referred to him, the defending party can put forward this argument in defence of the enforcement proceedings commenced by the successful party.

The Technology and Construction Court Guide (TCC Guide) also provides for the use of Part 8 Proceedings to challenge the validity of an adjudicator’s decision where the adjudicator has made clear error.

The Part 8 procedure may be used by the unsuccessful party if:

• there is a short self contained issue
• the issue requires no oral evidence
• the issue is one which it would be unconscionable to ignore if there were a summary judgment application

The outcome of a Part 8 claim, if successful, would be a finding from the court which supersedes (and potentially overrides) the adjudicator’s decision.

This is another question that you should consider if you are looking to challenge the enforcement of an adjudicator’s award. If the adjudicator has breached the rules of natural justice, you may have grounds to challenge enforcement of the decision. Some examples of this include an adjudicator’s failure to:

• Provide a party with adequate time to respond to submissions;
• Take into account submissions from one party;
• Act impartially; or
• Provide reasons for the decision (if requested or required).

If the court can be persuaded that the adjudicator has acted in material breach of the rules of natural justice, the adjudicator’s decision will not be enforced.

This is one of the most pertinent questions when considering whether there are grounds to challenge an adjudicator’s decision as a court will not enforce a decision that was made without jurisdiction. If any of the below apply to the adjudication, it may be possible to make a challenge to the adjudicator’s jurisdiction and the enforcement of any decision:

• The claims arise out of multiple contracts;
• The contract between the parties was not concluded;
• The adjudicator was not validly appointed;
• The contract had been novated prior to the adjudication proceedings;
• The dispute between the parties had not yet ‘crystallised’;
• The adjudicator answered a question that was not put to them;
• The adjudicator’s decision was not given in time;
• The dispute between the parties had settled prior to the adjudication proceedings; or
• The referring party did not have legal grounds to adjudicate (i.e. there was not a construction contract under the Housing Grants, Construction and Regeneration Act 1996).

To challenge an adjudicator’s decision on the grounds of a lack of jurisdiction, the unsuccessful party must have reserved its right to do so. This means that an objection must have been raised during the adjudication proceedings, whether this be on initial notice of the adjudication or later when the responding party realises that there are grounds to reserve its rights.

If the responding party must make payment as a result of the adjudicator’s decision, they should ensure that they state that such payment is without prejudice to its right to challenge the decision, as failure to do so will usually mean that the party will lose its entitlement to challenge the award.

Being presented with an adjudicator’s decision that finds against you is a daunting prospect for parties to construction contracts, however there are steps that a losing party can take to seek to prevent enforcement of the decision.

Although the Technology and Construction Court (TCC) is typically reluctant to go against an adjudicator’s decision, the court will do so if the party can clearly show that the adjudicator’s decision was made without jurisdiction or that there was a material breach of natural justice. The onus is therefore on the unsuccessful party to persuade the court that the adjudicator made an error in law, fact or procedure.

Have I reserved the right to bring a challenge?

To challenge an adjudicator’s decision on the grounds of a lack of jurisdiction, the unsuccessful party must have reserved its right to do so. This means that an objection must have been raised during the adjudication proceedings, whether this be on initial notice of the adjudication or later when the responding party realises that there are grounds to reserve its rights.

If the responding party must make payment as a result of the adjudicator’s decision, they should ensure that they state that such payment is without prejudice to its right to challenge the decision, as failure to do so will usually mean that the party will lose its entitlement to challenge the award.

Did the adjudicator have jurisdiction?

This is one of the most pertinent questions when considering whether there are grounds to challenge an adjudicator’s decision as a court will not enforce a decision that was made without jurisdiction. If any of the below apply to the adjudication, it may be possible to make a challenge to the adjudicator’s jurisdiction and the enforcement of any decision:

• The claims arise out of multiple contracts;
• The contract between the parties was not concluded;
• The adjudicator was not validly appointed;
• The contract had been novated prior to the adjudication proceedings;
• The dispute between the parties had not yet ‘crystallised’;
• The adjudicator answered a question that was not put to them;
• The adjudicator’s decision was not given in time;
• The dispute between the parties had settled prior to the adjudication proceedings; or
• The referring party did not have legal grounds to adjudicate (i.e. there was not a construction contract under the Housing Grants, Construction and Regeneration Act 1996).

Was there a material breach of the rules of natural justice?

This is another question that you should consider if you are looking to challenge the enforcement of an adjudicator’s award. If the adjudicator has breached the rules of natural justice, you may have grounds to challenge enforcement of the decision. Some examples of this include an adjudicator’s failure to:

• Provide a party with adequate time to respond to submissions;
• Take into account submissions from one party;
• Act impartially; or 
• Provide reasons for the decision (if requested or required).

If the court can be persuaded that the adjudicator has acted in material breach of the rules of natural justice, the adjudicator’s decision will not be enforced. 

Which proceedings should I use to challenge the decision?

The enforceability of an adjudicator’s decision can be challenged in the enforcement action itself, by defending the summary judgment application made by the claimant.  For example, if the adjudicator lacked jurisdiction to decide the dispute referred to him, the defending party can put forward this argument in defence of the enforcement proceedings commenced by the successful party.

The Technology and Construction Court Guide (TCC Guide) also provides for the use of Part 8 Proceedings to challenge the validity of an adjudicator’s decision where the adjudicator has made clear error.

The Part 8 procedure may be used by the unsuccessful party if:

• there is a short self contained issue
• the issue requires no oral evidence
• the issue is one which it would be unconscionable to ignore if there were a summary judgment application

The outcome of a Part 8 claim, if successful, would be a finding from the court which supersedes (and potentially overrides) the adjudicator’s decision.

If you have obtained an adjudicator’s award in your favour, the unsuccessful party is technically bound to comply with it. Such compliance, however, does not always materialise and you may well find the unsuccessful party refusing to abide by the decision.

To uphold the effectiveness of the adjudication process, successful parties in an adjudication may commence court proceedings to obtain judgment from the court, ordering the non-compliant party to comply with the adjudicator’s decision.

Approach of the Technology and Construction Court

Whilst the Housing Grants, Construction and Regeneration Act 1996 does not specifically deal with the enforcement of adjudicator’s decisions, the Technology and Construction Court (TCC) has developed a procedure relating to enforcement, with section 9 of the Technology and Construction Court Guide (TCC Guide) [insert link] confirming that the TCC will ordinarily deal with the enforcement of adjudicator’s decisions.

The TCC’s approach is to try to uphold adjudicators’ decisions unless it can be proved that the adjudicator had no jurisdiction or where there was a serious breach of natural justice. Proceedings to enforce an adjudicator’s decision are therefore usually a success for those wishing to enforce, with the TCC being reluctant to interfere with an adjudicator’s decision unless the adjudicator did not have the appropriate jurisdiction to decide on the dispute referred, or the adjudicator has made a significant error in law, fact or procedure, such as amounts to a breach of natural justice.

It is recommended that parties to adjudications familiarise themselves with the TCC Guide before commencing enforcement proceedings, as the Guide sets out the way in which a party can make an application to enforce an adjudicator’s decision as well as how to resolve issues which may arise during the adjudication or enforcement process.

Enforcement Proceedings

Enforcement proceedings themselves generally take the form of a claim brought pursuant to CPR Part 7 (albeit CPR Part 8 proceedings can be used if there is no substantial dispute as to fact and no monetary judgment is sought).

The process involves an application for summary judgment on the Part 7 claim, to provide a court judgment for the amount awarded by the adjudicator. The court will produce an order normally confirming an abridgment of time for the acknowledgement of service by the defending party, dates for service of evidence in response and a date for hearing of the summary judgment application.

An enforcement hearing should be scheduled by the court within 6 to 8 weeks of the application being made.

Judgment

If the Court grants summary judgment in accordance with the application, the claimant will have a Court judgment which can be enforced in any of the usual ways (e.g. charging order, bailiffs, threat of winding up proceedings etc.).

The statutory right to adjudication was introduced through the Housing Grants, Construction and Regeneration Act 1996. Its introduction changed construction contracts considerably as parties gained the statutory right to refer any dispute (commonly involving (but not limited to) payment) to adjudication at any time. It is not possible for parties to construction contracts to choose to ‘opt out’ of this process. But what exactly is ‘adjudication’?

Adjudication is a dispute resolution mechanism introduced to enable parties to construction contracts to resolve disputes in a timely and cost-effective manner. Prior to its introduction, parties to construction contracts would often be left with no choice but to commence long and costly court or arbitration proceedings in order to resolve disputes. Adjudication ultimately acts to aid the process of resolving construction disputes, allowing those disputes to be resolved during construction contracts quickly and (relatively) cheaply, whilst still providing the parties with a decision underpinned by legislation. Because of this, adjudication is usually the first port-of-call for parties facing a dispute during a construction project.

In addition to its efficiency in terms of time and cost, one of the key features of adjudication is that disputes can be referred to an adjudicator ‘at any time’, meaning that the referring party can seek a remedy to ease cash-flow whilst the construction project is still underway.

If one party wishes to refer a dispute to adjudication, the time between referral and the adjudicator’s decision will be a maximum of 28 days (unless extensions are agreed between the parties). This means that the referring party can seek a quick interim remedy instead of having to fund costly proceedings, with the latter option often not realistic for smaller construction companies who may be stretched financially – not least by the subject matter of the dispute.

Although adjudication was initially intended to counteract the sometimes devastating impact that disputes have on cash-flow, adjudication has become much more flexible, with the mechanism often used for contractual disputes, delay, defective work and issues of termination and determination. The adjudicator’s decision is however temporarily binding to enable the project to continue until the dispute is finally determined by legal proceedings, arbitration or a settlement agreement. As a result, adjudication is often described as a “pay now, argue later” mechanism.

The party seeking to commence adjudication proceedings should:

• ensure that there is a right to adjudication – ask “does this dispute definitely arise out of the construction contract?”; and

• Check that the dispute between the parties has ‘crystalised’, meaning that the basis for the claim has been clearly presented in writing to the intended respondent before starting the adjudication process.

Once the party is confident that the dispute has arisen out of the construction contract and has effectively ‘crystallised’, a party can commence adjudication proceedings by issuing a Notice of Adjudication and applying to the appropriate nominating body for the appointment of an adjudicator.

A contract (sometimes referred to as a contract underhand) and a deed are the two ways in which a binding legal agreement can be documented.

In the majority of commercial transactions, a contract will be used to document the relationship between the parties (such as that of a manufacturer and a retailer). Whilst a contract does not need to be in writing, it is advised for record keeping purposes that it is.

For a contract to be binding, there needs to be a clear offer, acceptance, consideration (i.e. cash changing hands) and the mutual intention of the parties to be bound legally. The contract is typically executed by both parties (or authorised representatives thereof) and will be binding and in effect from the date of the document.

Deeds on the other hand do not need consideration to have changed hands between the parties for the agreement to be legally binding and enforceable. A deed must be ‘prima facie’ a deed, must be in written form, validly executed and delivered (this does not mean physically delivered, rather when the parties intend to be bound – deeds are commonly stated as being delivered upon execution).

There are certain documents which have to be executed as a deed, such as powers of attorney and a handful or real estate related documents.

Deeds may also benefit from an extended limitation period, that being the amount of time after a contractual breach a claim can be brought. For contracts this is 6 years following the breach giving way to the claim, however for deeds this is typically 12 years.

Overall, in a typical commercial transaction where money is changing hands, a contract tends to be the preferable form of agreement. However, where money is not being exchanged or the parties wish to rely on an extended limitation period, then a deed may be more appropriate.