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You may want to buy or sell a company, or you may be part of the management of a company that wants to buy out the shares in that company. Our corporate team can provide you with the appropriate advice so that, working with you and your accountants, we can help to deliver the sale or purchase of the company.
Initially, you need to decide whether the share purchase is the appropriate transaction structure to use. Is a share sale appropriate or would it be better to purchase the assets or the company? You may be influenced by legal, commercial or tax considerations.
Other preliminary considerations may be whether tax clearance is required from HMRC under its advance clearance procedure, will there be any severance payments to the seller, how will intra group indebtedness be dealt with and what may happen in relation to tax losses.
You also need to consider financing for the purchase. Can the purchase be completed from the buyer’s own funds or will it need to raise capital by issuing new shares? Will debt finance be provided by a bank?
There may be a confidentiality agreement if confidential information is to be provided to a buyer and a buyer may want an exclusivity agreement that allows it to progress its purchase for an exclusive period.
The transaction will be recorded in the share purchase agreement (SPA) and disclosure letter together with other documents such as stock transfer form, shareholder resolutions, board minutes, directors’ resignations and appointments etc..
The SPA is likely to contain provisions dealing with the following:
- Who are the parties and do they have the right to sell the shares in the company? Who is the buyer and will it have sufficient finance to buy the company and trade the company after completion? Target company – The company must be identified.
- There will be an agreement to sell and purchase the shares. Are there any pre-emption rights in favour of (rights of first refusal) in favour of any of the shareholders that need to be dealt with?
- Consideration – What is the amount of the consideration and how will it be discharged? It may be with cash, issue of shares or loan notes.
- There may be price adjustment mechanisms whereby the price to be paid on completion will be adjusted by reference to completion accounts that are resolved after completion. Both the buyer and the seller will want to consider the most efficient structure for tax purposes; they will also want to ensure that any existing indebtedness of the company is discharged on completion.
- The price may be paid in full or in part on completion or part of the price may be deferred consideration. That deferred consideration may be based on future earnings and may be secured in favour of the seller. Does the buyer want to retain part of the price in an escrow account?
- The SPA will set out the obligations of the parties on completion of the purchase so that the seller will deliver a stock transfer form for the sale of shares and share certificate together with letters of resignation, company documents and a disclosure letter. It may also deliver releases of existing debt of the company.
- One of the areas that it likely to be subject to most discussion in the SPA is the area of warranties and indemnities. The SPA is likely to contain a number of warranties about the company and the business that it operates. Those warranties potentially give the buyer a claim against the seller in case of breach of the warranties. There may be limits in time and as to the amount of claims that can be made by the buyer.
- The seller will issue a disclosure letter on completion that discloses all relevant information in relation to the warranties. Claims against the seller will be qualified by reference to the disclosures.
- Tax covenant – There may be a tax covenant given by the seller in relation to pre-completion tax liabilities. This may be set out in the SPA.
- Restrictions on the seller – Will there be restrictions on activities that can be carried out by the seller after completion? There will be a limit on the duration of the restrictions and possibly the geographical area of the same. The restrictions may not be enforceable if they are unreasonable and go further than necessary to protect the buyer’s legitimate interests. Should those restrictions apply to not only the seller but also other members of the seller’s group?
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