How our team helped with a complex demerger process

Sometimes what looks like a simple goal can only be achieved through complex means.

Such was the case for our client, an FCA regulated company providing mortgage and financial advisory services owned 50/50 by its two founding directors. After they had operated together and grown the company successfully, it had got to the point where the company’s strategic growth could only be achieved by separating out the two main aspects of the business: mortgages on the one hand and other financial advisory services on the other.

Farringford Legal were ideal for our buy-out. Their understanding of us, as an FCA regulated business, and its implications were key to the successful and smooth conclusion of the matter. Having a team comprising with Andrew, senior lawyer and support team working alongside an experienced tax advisor helped make the complex simple. Kaoruko was great at communicating with assisting and following up on paperwork professionally even after completion.

The challenges

Given that this was a regulated business with a complicated debt structure which had experienced strong growth there were many challenges such as seeking FCA approval for the change of control, agreeing the debt rescheduling, and finding a tax beneficial structure for both the exiting shareholder and the legacy company. Added to that was the need to make new borrowing arrangements to fund the buy-out of the departing shareholder, repay debt and allow for some working capital for growth. In total the structure had all the elements of a full-blown management buy-out.

Although the concept of a buy-out is simple, the negotiations to reach the final deal structure took approximately two years. This is always likely to be the case where 50/50 shareholders, holding equal power, need to move steadily towards a firm consensus on sometimes opposing viewpoints.

In addition, despite being in the finance business, our client also faced the common issue that many small business owners face, which is that they had never previously been involved in a demerger or management buy-out!

In many ways this choice relied on a relationship of trust between Farringford Legal and the client. Having partnered with them through some of the more difficult points of the two-year negotiation, Farringford Legal was in a good position to hold the reins on the transaction aspects.

Just as importantly, Farringford Legal was also able to cover all the key requirements between its corporate, M&A, and financial services specialities together with a strong tax structuring advisory capability.

A transaction of this complexity is a significant milestone for any business, especially when the client is juggling this challenge while continuing to grow and build a thriving business our focus was to give reassurance to our client and explain the process step by step. As an SME-focused law firm, we are aware of the challenges small businesses face and see our role as necessarily involving an understanding of the stresses and strains of such an experience while giving sound guidance and reassurance.

The transaction team comprised a senior corporate solicitor, assisted by a trainee solicitor and a tax specialist. In addition, since the new lender required a personal guarantee from the remaining director, we were able to provide an additional corporate specialist to provide independent advice on the guarantee behind an ‘ethical wall’, something which often comes up in deals of this type.

This team dealt with the three main components of the transaction. The first was the negotiation and structuring of the purchase of the shares from the departing director. The second phase was to restructure the existing corporate group to add a new holding company. The third element was to agree all the documentation between the new lender and the new holding company together with a comprehensive security package from the holding company and other group companies.

Farringford Legal orchestrated all three sides of the transaction, using a traditional transaction structure where all of these three elements are initiated and completed within a single day.

The Results

As is usual for a restructuring requiring FCA consent, our client had to comply with numerous conditions and complete within a specified timeframe.

Inevitably, there were last minute changes of mind and extra demands placed on the client by the departing director’s solicitors which pushed us closer and closer to the deadline. In the end, the client was very relieved to complete successfully on the last day of the FCA deadline.

Our client has benefitted from this transaction by obtaining 100% ownership and control and the ability and freedom to steer the Company towards growth and the implementation of a new strategic plan.