As the Scottish market for deals involving wind projects hots up post referendum, Pamela Todd, a partner in the Energy team at Harper Macleod, considers some key points to consider as part of the due diligence process such deals entail.
There is a lot of activity in the wind energy market at the moment and it feels as if the greater certainty about Scotland’s future following the outcome of the referendum vote has flushed through a larger number of deals in which projects are being sold, financed or refinanced or otherwise invested in.
Carrying out an appropriate level of legal due diligence into a target project or company is an important aspect of a potential purchaser, investor or lender’s decision making process and is key to assessing whether or not the deal is worth doing. For the target company or owners of the target project, the process may well be a time consuming and often painful one.
Regardless of which side of the transaction you are on, having a clear understanding of what level of diligence is appropriate is important from the beginning. Acquiring a project by purchasing the individual contracts, consents and property assets will require a different approach to acquiring the same project by purchasing the company. Personal contracts or consents and restrictive alienation provisions will present a greater problem in the first case and debt and change of control clauses will present an issue in the other.
A good grasp of what is to be gained from the diligence exercise is key. Understanding every potential flaw will provide the purchaser or investor with ammunition to negotiate a reduction in the purchase price, or increased warranties or indemnities from the seller.
Keep the bigger picture in view. With larger projects, larger teams will be engaged in examining different aspects of the target. As well as checking the detail of the documents presented by the project owner, however, it is important to look for the cracks between them; satisfying yourself that each of the contracts presented in respect of a supply chain is important but it is also important to ensure that there are no links missing.
Most purchasers, lenders and investors understand these points very well, but this is often not the case for the owners of the target projects or companies. Their efforts and expertise will be in creating a business or project and they will generally find themselves unprepared for the level of scrutiny that a legal due diligence exercise entails. Well before exposing yourself to a potential purchaser’s glare, engaging professional advisers with experience of the process to ensure that all of the required information is available and properly presented is a worthwhile investment.
One last point; having gone through the pain of either providing or garnering all of the information, be prepared to walk away from the transaction. From a seller’s perspective, retaining the project and resolving the issues identified during the diligence process may be a better outcome than accepting a reduced price. From a purchaser’s or investor’s viewpoint, the investment of time and effort into the diligence process might feel wasted if the deal is not done, but the wise will draw a line under flawed deals and move on, without regret.
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