In order to transfer shares in a company, all that is technically needed is a Stock Transfer Form. From a seller's perspective this is the most cost-effective and risk-minimising approach. However, a buyer is very likely to insist on having a separate document, known as a share purchase agreement, in order to offer the buyer certain protections in relation to the acquisition. A buyer should consider what the seller is requesting and whether it is possible, or acceptable, to give it to them.
The first draft of the share purchase agreement is usually prepared by the buyer’s solicitors and will include the following key sections:
The purchase price payable by the buyer (known as the consideration), its structure and timing of payment, will be set out in the agreement. From a seller's perspective, it is important to ensure that this accurately reflects what has been agreed and that any deferred consideration obligations are carefully drafted to ensure that payment is received.
Provision for completion accounts may also be included to allow the purchase price to be adjusted to take into account any change in the financial position of the target company between completion and the date of the company's last accounts used as a basis for agreeing the purchase price.
A seller is likely to require certain warranties to be given in relation to the target company, in order to dilute the effect of the "caveat emptor" (buyer beware) principle.
Warranties are contractual statements given by the seller about the target company and its business. They may, depending on the nature of the target business, include statements relating to the financial health of the company, as well as its assets, contracts, employees and any litigation to which it is, or may be, subject.
From a seller's perspective, it is of course preferable not to give any warranties at all or to provide very limited warranties. However, if this is not possible, the seller's liability should be limited as much as is possible (see below) and careful consideration given to the disclosure.
A buyer of a business may require the seller to agree not to be involved in any competing business following completion, in order to protect the business of the target company. This can be achieved thought the use of restrictive covenants in the share purchase agreement, which will include non-solicitation of customers, suppliers and employees of the target company.
The extent to which a seller is willing to accept these restrictive covenants will depend on the future plans of the seller. However, it could prove difficult for the seller to resist entering into any form of restrictive covenant and to do so could raise questions as to the seller's intentions post-completion. It is possible for sellers to undertake certain business activities if these are agreed with the buyer.
Is there any outstanding litigation or other potential liabilities, such as a failure to comply with any legal requirements applicable to the business, which would be of If there are specific risks that have been identified by the buyer through due diligence or disclosure, a seller may seek an indemnity from the seller in relation to this risk. A buyer should always resist giving an indemnity unless absolutely necessary, as these are very unlikely to be limited and there is no duty on the buyer to mitigate its loss in relation to the indemnified risk.
Limitation of Liability
It is usual for a seller to seek to limit its liability under the agreement, specifically in relation to the warranties, and this is usually accepted by the buyer. However, the extent to which the liability can be limited is subject to negotiation.
The ways in which a seller may seek to limit its liability include:
- setting a financial limit on the seller's total liability for warranty claims;
- specifying a minimum value of claims that can be brought against the seller;
- setting a time limit for warranty claims;
- excluding liability for contingent claims;
- limiting liability to only those matters within the seller's knowledge; and
- disclosing matters against the warranties.
A tax covenant is usually a separate schedule to the share purchase agreement, which allocates the tax risks in relation to the acquisition between the buyer and the seller.
The risks are generally allocated on a before and after basis - with the seller responsible for tax liabilities arising pre-completion and the buyer responsible for those arising post-completion. However, this is subject to negotiation between the parties.
Whilst it is usually desirable for exchange and completion of a share sale to be simultaneous, there may be instances where a split exchange and completion is required and completion is conditional on certain conditions being met.
Examples of such conditions may be where one of the parties involved is a listed company and so the requirements of the Listing Rules have to be complied with, where the sellers require tax clearance from HM Revenue & Customs or where confirmation is required that a major customer or supplier of the target company will not terminate its agreement with the target company as a result of the acquisition.
During the period between exchange and completion, the buyer may seek certain assurances from the seller regarding how the company is run during this time - see A Buyer's Guide to a Share Purchase Agreement for more information.
If you or any connected party have other related interests, this is a good time to negotiate and finalise these arrangements as part of the deal eg transitional services agreement, Lease, supply agreement, consultancy agreement.