Strategic commercial interventions: exit strategy principles

Annex A – Divestment of an asset – sale option

Process for Expressions of Interest (EOIs)

When starting a divestment process, the sponsor team should begin by creating an Expression of Interest (EOI) template to be completed by the potential purchaser. This allows interested parties to make their initial intentions known as to their interest in acquiring the asset, and to eliminate any parties deemed not to be credible ensuring time, money and resource is spent appropriately. If the sponsor team regard the potential purchaser and indictive offer as credible, they should then notify Ministers of the EOI and seek Ministerial advice whether to proceed with or reject the initial proposal. If Ministers make the decision to begin proceedings of a formal offer from the potential buyer, the sponsor team should appoint external advisors to conduct detailed due diligence (financial, commercial, legal), into the business.

Once this initial due diligence has been conducted the sponsor team should notify Ministers of the outcome of the due diligence exercise to seek Ministerial clearance as to whether SG should proceed with the sale from this point. If the decision is to proceed then negotiations with the interested party can commence, led by the appointed commercial advisors. To supplement this, the sponsor team should also seek legal and subsidy control advice on the disposal of the asset. Thereafter, advice should be prepared for Ministers recommending whether or not to proceed further with the sale of the asset, and if agreed, the sales process can be taken to a conclusion with commercial and legal advisors.

Due Diligence considerations

Whilst selling or divesting of an asset on the face of it appears less onerous than in a situation where SG is looking to provide support to a business via intervention, there are still some important factors to consider. In the instance where SG is acting as a ‘seller’ it is prudent for the due diligence to attempt to determine the following at an early stage in the process:

• The reasons for the buyer’s interest in the acquisition (to ascertain credibility of offer).
• The buyer’s business and personal reputation given the potential impact to Scottish Ministers in selling to certain businesses or individuals.
• The buyer’s financial ability. This should scrutinised in greater detail by external advisors.
• The robustness of the buyer’s business plan post-acquisition and what this means for jobs, supply chain etc. This links in with SG’s initial strategic rationale for intervention in the first instance therefore needs to be considered at this juncture as well.
• Does the offer place any obligation of current/future support from Scottish Ministers or lead to any enduring liability for SG?

To support this, sponsor teams should look to undertake the following initial checks:

• Publicly available information – reputational impact:
  • Amnesty International
  • Human Rights Watch
  • Transparency International
  • Business and Human Rights Resource Centre
  • World Bank list of ineligible companies
• SG Finance assessment of financials and plan
• SGLD engagement

If a credible offer to purchase an asset is received, officials will require the services of a commercial advisor to lead the process potentially leading to a sale. This will include but is not limited to:

• financial review of acquiring business;
• strategic business review, looking into a business, its plans and aspirations;
• integrity due diligence, building on publicly available information sought above; and
• purchase offer handling including:
  • negotiating with potential purchasers on Minsters’ behalf,
  • undertaking detailed due diligence (financial, commercial, legal), and
  • preparing advice that officials will rely on when recommending whether to accept or decline any serious purchase offer.

Preparing for a sale

Whatever the reason for selling, SG should be sure of its objectives and its plan to achieve them. There are a variety of steps that SG may need to take to prepare a business for sale, particularly if it is part of a group, including:

• reorganisation of assets within the group;
• identifying and considering how to deal with assets which are shared by the target business with other businesses within the group. These may include, for example, intellectual property and employees; and
• ensuring that information which the buyer is likely to require as part of its due diligence exercise is readily available and up to date. This may include, for example, information about properties, financial information, key contracts, actual or pending litigation etc.

At the outset, a decision will require to be made based on legal advice as to whether the sale process will be restricted or open-market. The sales process may be proactive or triggered by an approach from a credible potential buyer. Appropriate governance should be put in place to guide the decision making process.

Overview of the transaction in a sales process

Whilst every sales process will be unique, most transactions are likely to include the following broad phases:

1. dealing with pre-contract documents, such as confidentiality agreements, heads of terms and exclusivity agreements;

2. carrying out due diligence on the target business and, as necessary, the seller;

3. obtaining any third-party consents and approvals that are required before the transaction can proceed or that must be made a condition of the deal;

4. preparing and agreeing the documentation required to implement the transaction. In most instances, this includes a detailed business / asset purchase agreement which records the terms on which the seller agrees to sell and the buyer agrees to purchase the target business;

5. signing and exchanging the transaction documents so that they have legal effect; and

6. completing the transfer of the target business to the buyer and dealing with any applicable post-completion formalities.

Whilst the above sets out the broad phases of a sale from an external perspective, alongside this, developing an HMT Green Book aligned five case business case to demonstrate the strategic, economic, financial, commercial and management cases of the divestment compared with a hold scenario will be required as well. Through the business case process multiple offers can then be compared objectively.