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If the Brexit were a Corporate Transaction....

I was lucky enough to be trained by one of the best (some say the very best) corporate transaction lawyers in the country. While working in his team, much of the time preparing for any transaction was spent making checklists and drawing up spreadsheets. Planning.

LUCK?

He developed a metaphor. He said, airline pilots with tens of thousands of hours in the air, start every journey with their pre-flight checklist. The point he was making was that no matter how good or how experienced you were as a lawyer, a checklist would ensure that everything was covered. Should anything go wrong (it never did), and if a tribunal had to make a finding on way or the other, the team that implemented a transaction with a check list would more likely be found to have acted reasonably.

That said, every transaction would commence with swathes of the Companies Act and applicable regulations being converted into a checklist and a spreadsheet. The result, nothing left to chance. Lawyers acting reasonably. Luck? No. Planning? Yes.

IF BREXIT WAS A TRANSACTION

If Brexit was a transaction, my mentor would certainly have been better prepared than the Leave campaign.

Conceptually, Brexit is akin to a demerger. The UK is a "subsidiary" of the European Union. It is not wholly independent. Many of the administrative and corporate services enjoyed by the UK subsidiary are rendered by and from within the EU "holding company", from its head office in Brussels.

In addition, certain fees, rebates and loans pass back and forth by and between the subsidiary and holding company and the holding company's bankers, in accordance with the governing financial instruments. The EU holds treasury notes and bonds, debentures, shares and the like. Certain of the UK's operations and activities are governed by EU wide constitutional documents, service agreements and policies.

The UK is now the subject of a management led buy-out. The UK management team will be leading a transaction in terms of which the controlling interest in the UK is acquired from the EU. The UK management have effectively been mandated to exercise a call option in accordance with section 50 of the merger treaty.

Given the amount of surprise expressed by the UK management, staff and stakeholders, it seems that everyone is guilty of insufficient planning. Who takes a resolution to shareholders without contemplating that the resolution will be adopted?

My mentor trained me to ensure that every step of a proposed transaction is planned before such a resolution is put to shareholders. Had the leaders of the Leave campaign been lucky enough to work in our team, they would most certainly have planned their transaction by considering the following seven guiding principles

1. Due Diligence and Modes

Understand the scope of the transaction by assessing the present state affairs in contradistinction to the desired outcome. The business operations that will be required after the implementation of the proposed transaction must be modelled. This will clarify which parts of the business will be carved out or discarded. The model should account for governance, finance and compliance obligations. The proposed standard operating procedures should be built into the model at this stage.

2. Consider Challenges

Consider costs and risks thoroughly. The model should make allowance for additional capacity and the systems needed to operate. Consideration must be given to the processes and procedures will be relevant to the discharge of regulatory and compliance obligations. At this point, the management should be in a position to determine whether the scope of the transaction is too large and the benefit doesn’t outweigh the cost. If is concluded that the cost ought to weigh the benefits at this stage, great expense will have been avoided.

3. The Transaction Team

The transaction team will work with the professional advisors, lenders, IT and HR to develop the implementation plan. Assuming the that newly independent entity will need to fly solo, the transaction team must have the ability to plan for or develop systems, facilities and support services for the new entity.

The will renegotiate and facilitate new service level agreements, leases, funding sources, supplier contracts, license agreements and contracts of employment. Choose your team wisely.

4. Simulate the Transaction

If the proposed transaction is given the go ahead, the transaction team will be better placed to implement the transaction if it has been simulated. The purpose of the simulation is to subject the model and the standard operating procedures to stress tests and dry runs. After a stress test simulation, the processed that need to be separated or replicated will be more readily identifiable.

5. Build a Business Back-bone

The back bone of any business is its management system. It transaction team should be instrumental in its design, which should be based on the model. This system will be the back bone for each management and operational process. It will be the foundation of future models, training materials, internal policies as well as compliance and regulation management processes. A strong spine is necessary for active limbs and vigorous activity.

6. Implementation

Once the transaction has been simulated, the implementation of the proposed transaction can commence. The model (tested and fortified) will guide the implementation process. The majority of the risk and cost of a proposed transaction lies in the implementation phase. If, however, the due diligence has been properly carried out, and if the modelling approach and simulation is analysed in detail, a successful outcome is more likely.

7. Is the Fat Lady singing?

The demerged company should be treated like a new born baby. The expectations of both the parent and the demerged entity must be managed from very beginning. At least until emotional independence on the part of the parent and operational independence on the part of the demerged entity is achieved.

Until the dulcet tones of the fat lady can be heard, the demerged entity should be swaddled and cuddled, watched and monitored.

Adam Pike
Author: Adam Pike
Adam Pike holds BA, LLB and LLM degrees from the University of Cape Town. His LLM, attained from the School of Advanced Legal Studies at the University of Cape Town, focused on commercial and corporate law, particularly corporate governance and securities. Adam specialises in the implementation of corporate actions and transactions.

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