Buying or selling a company’s shares is a complicated business. Whether you’re the buyer or the seller, you’ll need to work through various steps with the aim of limiting the potential exposure to the risks involved in these type of transactions.
Typically, the process will start off with a meeting between representatives of both parties (assuming both to be corporates) and, if there appears to be interest, the parties will normally proceed along the following lines although the order in which matters progress may vary from case to case:
- Confidentiality or Non-Disclosure Agreement: Before the parties are likely to divulge confidential information to each other, it’s most likely they’ll want to enter into a confidentiality or non-disclosure agreement (NDA) which is self-explanatory. They might also consider including a ‘lockout period’ under which the seller will agree not to enter into negotiations or sell the company to another buyer while the due diligence process and Share Purchase Agreement negotiations are underway.
- Heads of Agreement – Heads of Terms – Memo of Understanding etc: If, following initial discussions, there appears to be interest, the parties will often enter into Heads of Agreement (or other document by a different name but having the same effect) to set out the principal terms of the proposed deal. This document ought to be fairly short and should be expressed to be non-legally binding save in respect of any terms which they specifically agree to be binding. These binding terms might be any provisions in relation to confidentiality or non-disclosure if these are not covered in a separate Confidentiality Agreement or NDA or an agreement in relation to the payment of costs especially if the seller pulls out without good reason. There is a particular risk here for the buyer as the costs of undertaking due diligence can be substantial which will be wasted if the seller pulls out.
- Due Diligence: In addition to any information provided by the seller, the buyer will want to conduct its own investigations into the company so as to be able to make an informed decision as to whether to proceed or not and, if so, at what price and on what terms and conditions. These investigations are known as due diligence. Due diligence takes many different forms and includes enquiries made of the seller in relation to the company by both the buyer’s management team as well as by different professional advisers into areas such as the commercial operations of the company, its management and employees, its accounting and tax affairs, its land, buildings and leases, its intellectual property, its legal status and any litigation or disputes be they actual, potential or contingent. The initial responsibility for this usually falls on the buyer’s accountants and tax advisers with other advisers getting involved following their initial report. The information gathered during this process will be used by the buyer and its advisers to further assess the target company, reassess any terms in the Heads of Agreement on the basis of the initial due diligence and decide whether to proceed or not and any adjustments needed to the terms and conditions.
- Share Purchase Agreement: The Share Purchase Agreement (or SPA as it’s commonly called) is the principal document used to record the terms of the sale and purchase of a company’s shares. Although not always the case, typically in private company transactions, this involves the sale of the entire issued share capital of the company. The SPA is a very detailed document and will include warranties and indemnities dealt with separately below. The SPA will set out the consideration and whether it is to be paid in cash or shares or loan notes in the buyer (or its holding company) or whatever it may be or in some combination of these and whether any cash consideration will be paid in one lump sum or in instalments (known as ‘deferred consideration’) and, if so, if it is to be secured or not or if any part of the consideration is to be calculated on the basis of the performance of the company after completion (which is known as an ‘earnout’). The SPA will usually include restrictive covenants restricting the sellers and key players (retiring at completion) from competing with the company after completion and might also provide for a short-term Consultancy Agreement to be entered into at completion with the seller or retiring key players.
- Warranties and Indemnities: The warranties and indemnities form a part of the SPA and will cover a whole host of issues including any specific issues uncovered during the due diligence process. The SPA might also include representations (in addition to warranties) as well as indemnities to cover specific known problems or issues.
- Warranty Limitations: The amounts that can be claimed for breach of the warranties and the time period in which they can be brought should be included in the SPA and these periods will usually be different for claims brought under the general warranties and for those brought under the tax warranties and tax covenant.
- Tax Covenant: Tax is typically dealt with in a separate Tax Covenant within the SPA.
- Disclosure Letter: The Disclosure Letter is an associated document prepared by the advisers acting for those giving the warranties and sets out important qualifications to the warranties contained in the SPA (but not the Tax Covenant). The main purpose of the Disclosure Letter is to preclude a buyer from making a warranty claim in respect of matters fairly brought to the attention of the buyer before exchange of contracts. The Disclosure Letter is also used to bring together in one place certain non-contentious information regarding the company.
- Other Arrangements and Documentation: It’s not unusual for there to be further arrangements and documentation to accommodate the needs of the specific transaction. For example, sometimes an ‘escrow account’ will be needed to hold monies due by one party to the other or, alternatively, for monies to be held by one firm of Solicitors under the terms of a Solicitors’ Undertaking pending the particular requirements of the transaction. These arrangements must be very carefully considered and recorded so as to reduce the likelihood of monies being trapped in an escrow account or solicitors’ client account pending the resolution of a dispute. In circumstances where the buyer is a listed company, there will be additional compliance matters at the outset such as advising on the restrictions relating to ‘insider trading’ and the consequences of breaching these restrictions and the requirement for complete secrecy until an official announcement has been made.
- Company Secretarial Matters: Meetings of the seller, the buyer and the company (assuming they’re all corporates) will all be needed to consider and approve the proposed transaction and to disclose any interests by the directors. There may also need approval by the shareholders depending on the circumstances and these will all need to be properly recorded in appropriate Board Minutes and resolutions prepared in advance.
- Post Completion Matters: Following completion, the stock transfer forms, which attract stamp duty as 0.5%, will need to be submitted to the Stamp Office and, once paid and the form stamped, the Register of Members of the Company will be updated to reflect the change in ownership with the name of the buyer being entered in the Register of Members as the new owner of the sale shares and a share certificate being issued. Changes in the directors, the registered office address and the accounting reference date of the company (if being changed to match the same accounting reference date as the buyer) will all need to be filed at Companies House after completion.
At Ccall, we help clients, be they buyers or sellers, through the process of buying or selling a company. Please contact us if you need advice.
Notice: This blog is written for information purposes only and it is not (nor is it intended to be) advice. Readers should always seek independent advice on the particular circumstances of each case.