As the year 2000 draws ever closer, purchasers are becoming increasingly nervous about the potential effects of the "millennium bug" on the businesses they are acquiring. The danger that computers and other systems do not recognise the change to the year 2000 affects not just the target business, but also its suppliers and customers without whose continued support the business may not be able to function.
In May, the British Computer Society reported that nine out of ten UK businesses are likely to experience Year 2000 problems, but that only three out of ten have a contingency plan in place. How then do purchasers and their funders reach a level of comfort about the businesses they are acquiring?
Due diligence
As part of its due diligence exercise, a purchaser should review the steps taken by the target business to ensure millennium compliance. The British Computer Society has suggested 5 steps to Year 2000 contingency planning:
- assess critical applications and set priorities;
- create contingency plan;
- assemble appropriate tools;
- train staff; and
- simulate the disaster and test the plans.
Has the target taken these steps?
Warranties
Some comfort on millennium compliance can also be obtained through the use of warranties in the sale and purchase agreement. These can provide a means of claiming back part of the sale price in the event that systems break down. However, there are a number of difficulties with this approach.
- Vendors tend to be paranoid about warranting matters outside their control or knowledge. So Year 2000 warranties are generally loosely worded, subject to the knowledge, information and belief of the vendor and relate only to the systems of the target business (rather than suppliers and customers as well).
- To successfully bring a warranty claim, the difference between the value of the business as a result of breach of warranty and what its value would otherwise have been needs to be proved and agreed with the vendor or determined by a court.
- Barriers on warranty claims set out in the sale and purchase agreement need to be satisfied. For example, does the value of the claim exceed the de minimise level?
Deferred completion
Split exchange and completion can also protect against the millennium bug. A conditional agreement is signed and exchanged prior to midnight on 31 December 1999 but does not become unconditional until evidence has been produced that the date change has had no material effect on the business. The advantage is that if there is a difficulty with compliance the purchaser can pull out. The disadvantage is that the business continues to be run by the vendor until completion.
In practice, purchasers may choose to make use of some or none of the above comforts or, indeed, to go for the ultimate comfort and not buy the business until after the effects of the millennium bug are known.
For further information please contact Jonathan Jones, 2 Park Lane, Leeds LS3 1ES
Tel: +44 113 284 7072.
This article was first published in the Autumn 1999 issue of Hammond Suddards' Corporate Finance Newsletter.
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
