Construction companies are complex businesses. Typically, a construction company will have entered into numerous contractual arrangements with a range of clients, sub-contractors and suppliers, as well as ancillary undertakings such as bonds, guarantees and collateral warranties. There will be a mix of ongoing and completed contracts, with potential liabilities extending for up to 12 years after completion.
When it comes to selling a construction company, corporate/commercial lawyers usually lead the legal team, with construction specialists in a supporting role. Yet construction issues often become crucial as the deal progresses. In many cases, this is because the buyer’s due diligence reveals unforeseen issues affecting the value of the company.
The seller puts itself in the strongest position if it identifies these issues in advance and develops a strategy for dealing with them. This helps the seller minimise onerous demands from the buyer, which may include:
· reducing the purchase price;
· the seller indemnifying the buyer against certain liabilities; or
· the seller retaining liability for certain projects.
Here are some key points to look out for if you want a sale to go smoothly:
Find the contracts. Don’t assume that the seller has a neatly stored package of construction contracts ready for review. Allow time to locate and organise documents. Identify projects where contracts are lost, partially lost or unexecuted, or where work appears to have been carried out under a letter of intent. Leaving these matters unattended may give the buyer a bargaining point later in negotiations.
Establish limitation periods. This may be difficult if contract documents are incorrectly executed or include indemnities, which can extend liability beyond the usual period of six or 12 years.
Look out for parent company guarantees. The construction company’s parent will want to be released from any guarantees it has given. This may require negotiation with the beneficiary of each guarantee as well as the buyer.
Think about joint ventures. Consider whether the seller wants to be freed from any joint venture agreements and look out for pre-emption rights preventing transfer of the business or individual contracts. Discussions with joint venture partners may be necessary.
Check whether construction contracts can be assigned. Many construction contracts require the employer’s consent to assignment by the contractor. If the works are ongoing, consider whether the contract should be novated, so both its benefit and burden are transferred to the buyer. These issues will require negotiation with the employer. If the employer’s consent cannot be obtained, it may be possible to achieve a similar result via an agency or trust mechanism, but these are legally complex and will require careful structuring.
Consider framework agreements. An employer under a framework agreement may not be happy if someone new steps into the shoes of its chosen contractor. The framework agreement may include change of control provisions. Less formally, the contractor’s relationship with the employer may require special care, so the employer retains confidence in the contractor.
Beware of internal arrangements between group companies. For example, the construction company might be part of a group that includes a piling sub-contractor. Sub-contracts between these two companies may not be vigorously negotiated because they are related entities. Before the contractor is sold, those sub-contracts should be carefully reviewed to check that they are at arm’s length.
This post only highlights matters that are easily overlooked. The seller must still address well-known issues such as disputes, bonds, insurance and collateral warranties, as well as non-construction specific matters such as transfer of staff, premises and pension scheme issues. If you have any tips of your own, please feel free to post a reply.