Overview of a Corporate Transaction (Sale or Purchase of Shares)
- Initial Planning
1.1 Appoint professional teams
Need to appoint your accountancy/tax/legal/corporate finance advisors as appropriate
1.2 Determine Structure
Seek advice on the structure of the transaction, what you’re looking to achieve and determine what works best for you (as Seller or Buyer)
Seek tax advice on whether any tax clearances should be sought
Determine how the transaction will be funded (if a Buyer) and get lenders on board as soon as practicable
Consider how the purchase price will be paid, ie. Is some deferred? Is there a retention? Is there to be completion accounts or a locked box mechanism? Will some consideration shares in the Buyer be issued? Each of these may impact the price paid/value of shares and have tax consequences
2. Initial Documents
2.1 Heads of Terms
Once initial discussions have taken place between Buyer and Seller, the main terms should be detailed in Heads of Terms. These should include the principal terms and an exclusivity provision
2.2 Confidentiality Agreement
Before any information on the target company is provided to the Buyer, they should sign a Confidentiality or Non-Disclosure Agreement. These provisions should be included in the Heads of Terms if a separate agreement is not entered into
3. Due Diligence
The Buyer will conduct legal, financial and accounting due diligence into the Seller and the target company in order to obtain information, inform its negotiations and plan for the integration of the target company into its existing group.
3.1 Due Diligence Enquiries
The Buyer’s and the Seller’s financial advisors will deal with the financial due diligence aspects. The legal due diligence questionnaire will be sent by the Buyer’s solicitor to the Seller’s solicitor. This will usually be an extensive list of questions on all aspects of the target company and the seller’s ownership of the shares.
3.2 Replies to Enquiries
The Seller will need to work through this questionnaire and provide responses to each question and supporting documents wherever possible. Often these will be uploaded to a virtual data room and the Buyer’s team will be granted access to this information.
The Buyer’s team may raise further due diligence enquiries for the Seller to respond to.
3.3 Due Diligence Report
The Buyer’s team will review the responses and information provided and report on the findings.
4. Share Purchase Agreement (SPA)
4.1 Drafting the SPA
The Buyer’s solicitor usually prepares the first draft SPA. This is usually a lengthy document. This will be sent to the Seller’s solicitor, who will review, discuss with the Seller and prepare a mark-up of the SPA with any concerns/issues they have and amendments they wish to make. Drafts will pass to and fro up until all issues have been resolved and the parties are ready for exchange/completion.
4.2 Tax Covenant
The tax indemnity or covenant for historic tax liabilities is usually included within the SPA.
The Seller will have to give fairly extensive warranties about all aspects of the company and their ownership of the shares – these will cover the same sort of areas as the due diligence. Warranties will be one of the most negotiated parts of the SPA. Warranties are statements of fact about the company, given by the Seller, as at completion. If any of the statement is factually incorrect, the Seller will need to make a disclosure against such warranty stating why it is incorrect.
4.4 Limitations on the liability of the Seller
The SPA should also include provisions for limiting the liability of the Seller under the SPA, in particular, under the warranties. The extent of these will be subject to much negotiation.
5. Disclosure Letter
The disclosure letter serves a separate purpose to due diligence, even though both involve providing information concerning the target to the Buyer. It allows the Seller to qualify the warranties set out in the SPA and thereby limit the potential liability under them. If, following a Buyer’s claim for breach of warranty, a matter can be shown to have been disclosed to the Buyer (meeting the standard of disclosure described in the SPA), the Buyer’s warranty claim will not succeed.
The Disclosure Letter usually has a specific format, the first part being the general disclosures and the second part being the specific disclosures. The extent of the general disclosures will be negotiated between the respective legal advisors. The Seller will need to review the warranties (with both legal, financial and tax advisors) and provide any necessary disclosures against the warranties. The Seller’s solicitor will then put these into the Disclosure Letter.
6. Ancillary Documents
There will always be ancillary documents in a share sale or purchase. These can be numerous but will generally include:
- Board Minutes
- Shareholder Resolutions
- Stock Transfer Forms
- Resignation letters
- Settlement Agreements
- Powers of Attorney
- PSC notices
- Various Companies House forms
Depending upon the structure of the transaction, there may also be:
- Loan Note Instruments
- Retention/Escrow Agreements
- Shareholders Agreements
- New Articles of Association
- Contribution Agreement
Once all of the above documents have been agreed, they will be signed by the parties and once the Buyer’s solicitor is in receipt of funds and ready to send these to the Seller’s solicitor, the transaction can be completed.
If you have any questions or queries in relation to this blog, please do get in touch – by telephone on 0161 926 9969 or by email to firstname.lastname@example.org.