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Why carry out legal due diligence for intra-group business transfers?

This guide was last updated in August 2012.

Sometimes a group of companies will reorganise itself using a transfer of a trade, which involves the sale within the group of a business and assets. Despite there being no overall change of ownership it is still important to conduct due diligence on that transaction. 

The investigations needed for an intra-group transfer are obviously not as extensive as those required for buying a business from an unconnected third party. However, there are still important factors to be addressed.

Due diligence investigations for an intra-group transfer should focus on:

Ensuring assets are transferred effectively – particular formalities are required in the transfer of some assets or rights. Real estate and registered trade marks, for example, have particular formalities attached to them. Due diligence is needed in order to identify where this might be the case so that the actions needed for implementation can be planned. This includes making sure that any mortgages or charges affecting the assets to be transferred are released.

Preserving valuable rights – in some cases an attempt to transfer contractual rights from one group company to another will enable the third party to terminate the contract. This may have significant commercial impactions if the contractual rights are valuable – for example, a long-term supply contract which guarantees revenue from a third party contract. One of the objectives of the due diligence review will be to identify which contracts have inherent value and require third party consent in advance.

Avoiding third party liabilities – an intra-group transfer can inadvertently trigger a third party liability, whether to private entities or to a governmental organisation. For instance where a company participates in a 'defined benefit' pension plan (also know as a 'final salary' plan), a transfer of assets may expose the group to the risk of the Pensions Regulator ordering money to be paid into the scheme, or financial support measures to be put in place in relation to the scheme.

Complying with regulatory requirements – the transferee company may need to comply with regulatory requirements in order to carry on the business. This may range from FSA authorisation to data protection registration. The legal due diligence process needs to identify which licences, consents and authorisations are needed so that they can be put in place.

Managing employment issues – if employees are to remain on the same terms and no redundancies are planned then in general the requirements of English employment law are relatively simple to comply with. Complications can arise, however, if for example the transfer entails changes in the job descriptions of staff engaged by the transferor or transferee entities. These issues need to be identified during the due diligence phase, and factored into the project planning.

These issues will commonly be assessed during the planning phase of projects involving an intra-group transfer, and the outcome of the investigations should be captured in the detailed implementation plan.