? downgraded credit ratings for many energy companies;

? low electricity prices in many jurisdictions (especially the UK and Germany);

? competition pressures arising from increasingly liberalised energy markets across Europe; and

? the likelihood of insolvency or the appointment of receivers to manage some electricity companies.

Some of the sales will be at distressed prices.

Set out below are some key legal issues to be addressed in a sale or acquisition of power assets with a particular emphasis on issues associated with a ?distressed? sale.

Consideration and speed

A distressed seller will need cash fast so an astute buyer will often offer:

? cash instead of shares or other forms of consideration; and

? the ability to close a transaction quickly (i.e. conducting only high level due diligence and assembling a team with experience and authority to conclude the deal).

The emphasis of both parties should be on concluding a commercial deal and exchanging contracts, leaving satisfaction of conditions precedent (including regulatory approvals) and completion to run their course.

Acquisitions outside insolvency

The sale process chosen by the seller will impact upon value and speed. An auction with multiple bidders may bring the highest value but will usually be at the expense of speed.

Negotiating with parties identified by financial advisors may lead to a swifter sales process.

Any sale will need to be ?bankruptcy proof' to ensure it is not overturned by the subsequent insolvency of the seller. Thought should be given to the sellers' funding post-closing.

Acquisition from an insolvent company

Insolvent companies involved in asset sale, including those under the control of an administrative receiver acting for the secured creditors, may be exposed to additional pressures. In exercising a power of sale, the administrative receiver and mortgagee are under a duty to take reasonable care to obtain the best price reasonably obtainable. Administrative receivers, liquidators and creditor committees will usually offer no, or very limited, warranties to any purchaser. The warranties, if given, will be limited in scope and duration and are likely to have a high threshold for bringing claims and a low ceiling for the total amount that may be claimed.

Asset Sale or Share Sale

The vendor may choose to sell either individual assets (including contractual positions), assets that together form a discrete business or the shares of a subsidiary company (those shares representing either a controlling or minority interest).

The advantage of an asset sale is that the purchaser knows what it is buying and does not acquire any unknown or unquantified liabilities. Therefore, less due diligence is required and, in theory, fewer warranties should be required compared to a share sale (where the potential is for liabilities to be larger than originally expected).

The disadvantages of an asset sale are:

? it will take time and considerable paperwork to assign or novate and, if necessary, apply for the numerous contracts, permits, authorisations and intellectual property rights to conduct business; and

? it is likely to be subject to higher levels of stamp duty and other taxes compared to a share sale.

Restrictions on sale/assignment

The sale of shares in a company may be restricted:

? by pre-emption rights in favour of other shareholders existing either in a shareholders agreement or statute;

? if the sale is of shares of a publicly listed company; or

? by restrictive covenants in various agreements (e.g. loan agreements, power purchase agreements, gas sale agreements and permits) entered into by the target company (i.e. change of control covenants).

All of these act as a fetter on the sale process and the vendor may have difficulties inducing a third party to bid for the shares unless sufficient comfort can be given that the proposed sale is likely to be completed.

Pre-emption rights and change of control provisions will often contain exceptions for a sale of shares to an ?affiliate?. A well drafted provision will include restrictions on a sale to an affiliate whose shares are immediately bought by the third party purchaser.

The sale of the assets (including various agreements) of a company may also be subject to change of control provisions.

In both share sale and asset sale transactions, allowance should be made for the time it will take to obtain approvals from third parties (including having to renegotiate agreements in return for an approval (especially if the purchaser is less creditworthy)).

Due diligence

Most disposals, whether of shares or assets, will require some level of due diligence. Buying shares or assets of a co-shareholder or co-venturer are possible exceptions to this rule. The amount of due diligence done by the purchaser will affect expectations about the scope and detail of warranties given by the vendor.

Searches of public registries (e.g. Companies House, Courts and Land Registry) can be done immediately to ascertain whether the vendor is insolvent, to analyse its constituent documents for appropriate authority to conduct the sale and to ascertain which assets (e.g. real property, intellectual property) are publicly registered.

Confidentiality

Various agreements entered into by the vendor and/or the project company will contain confidentiality provisions. The vendor will need to ensure that it is not in breach of those provisions prior to commencing the sale process. Waivers from fellow shareholders (who may have pre-emptive rights) and third parties may not always be in those parties' interests. It is important to address these issues early on in the sale process and obtain appropriate confidentiality undertakings from potential purchasers.

Lenders' approval

Projects developed using limited recourse debt will usually require the lenders' consent to the sale of any shareholder's interest in the project. An exemption may exist for transfers to an ?affiliate? with a time restriction on an ?immediate? sale by the affiliate to a third party. A similar prohibition and exemption is likely to apply to a sale and purchase of the holding company of the shareholder.

Assuming that lenders' approval is obtained, it is likely the new shareholder will be required to provide the same or increased security to the lenders (i.e. pledge or mortgage of shares) and to enter into existing or enhanced sponsor support obligations (i.e. subordinated loans or contingent equity).

The purchaser should examine its own borrowing restrictions. The acquisition of a highly geared subsidiary may breach gearing ratio limits in the purchaser's lending arrangements. Those lending arrangements may provide a limited time period in which to reduce the new subsidiary's gearing and the purchaser should consider whether this would be achievable.

Government approvals

A purchaser of UK assets or shares will need to consider EU and UK competition law. Any purchaser of assets outside its home jurisdiction will need to determine if there are any applicable foreign investment laws.

If the assets of an electricity company are being sold, a generating licence issued in England and Wales is capable of being transferred, in whole or part, with the consent of the Gas & Electricity Markets Authority. Such approval will take a number of months to obtain (there is a mandatory 2 month consultation period).

In respect of an asset sale, numerous governmental consents will be required, among them those relating to real property, town planning and the environment.

In both an asset and share sale, apportionment of liabilities for environmental contamination should be considered very carefully. Proper due diligence by the purchaser is essential and this will usually require an environmental report by qualified consultants with appropriate professional indemnity insurance. If the vendor provides warranties related to contamination, thought should be given to the financial strength of the vendor post-completion and, if necessary, the escrow of a portion of the purchase price until the expiry of the warranty period so as to ensure funds are available to meet any warranty claims.

Exchange and completion

If approvals are needed and are not obtained prior to the exchange/signing of the sale and purchase agreement, a delay will be required between exchange/signing and completion.

The parties will need to allocate amongst themselves the risk of damage to the power station or its assets during this period and a mechanism for adjusting the sale price based upon the damage incurred.

Additionally, the purchaser will expect the vendor and project company to abide by restrictions on its activities without the approval of the purchaser.

The purchaser should also ensure that contracts are managed by the vendor prior to completion on a ?pro rata basis' so that obligations and rights under the contract are spread evenly over the relevant time period. For example, if the vendor has a yearly take or pay fuel supply agreement and completion will take three months, it should be required to take or pay for only a quarter of the fuel.

Division of contractual rights

The vendor may wish to retain the partial benefit of some contracts (i.e. a large fuel supply contract). Thought should be given as to whether the contractual counterparty would consent to a splitting of the contract or if either the vendor or the purchaser would be willing to manage (and take credit risk) for the whole contract on behalf of both parties.

Tax

Detailed tax advice will need to be obtained and will vary with each sale. Clearance may need to be obtained from the tax authorities and time should be allowed for this process.

Financial assistance

In the UK, the target company needs to ensure that it does not give financial assistance to the purchaser in implementing the transaction. This is unlikely to be the case in a true limited recourse financing. If financial assistance is given, a private company may be able to take advantage of the ?whitewash? procedure in sections 155-158 of the Companies Act.

Conclusion

The European electricity market is likely to see more distressed asset sales over 2002-2003. Advisors will need to move quickly and decisively to help conclude such deals if they are to (a) satisfy the seller's need to conclude the transaction, (b) satisfy the buyer's legitimate due diligence inquiries and (c) address the many other issues involved in any sale and purchase. n

Tony Hawkins is an associate and Bruce Johnston is a partner in the London office of LeBoeuf, Lamb, Greene & MacRae.