The first draft of the share purchase agreement is usually prepared by the buyer’s solicitors and will include the following key sections:
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.
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.
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.
If there is any outstanding litigation or other potential liabilities, such as a failure to comply with any legal requirements applicable to the business, which have been identified by the buyer through due diligence or disclosure, a buyer may seek an indemnity from the seller in relation to this risk. A seller 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.
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.
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 e.g. transitional services agreement, Lease, supply agreement, consultancy agreement.