Orr Litchfield
Solicitors and Business Lawyers
Solicitors and Business Lawyers
A company share purchase or sale ('share purchase') is a transaction which involves a shareholder (or shareholders) (the ‘Seller’) selling some or all of their shares in the target company (the ‘Target’) to a buyer (the ‘Buyer’).
In a company structure, the shareholders own the company through their shareholdings. The company has a separate legal personality from its shareholders. As such, the company will be the owner of the underlying assets and rights of its business and be responsible for its liabilities.
In a share purchase transaction, the Seller and the Buyer may be any category of legal person (or persons) – incorporated or unincorporated. The Target will be a company. Usually, the Buyer will acquire the Target as a whole (including both the benefit of its assets and rights, and the burden of its liabilities and obligations) from the Seller by purchasing the Seller’s shares in the Company. Accordingly, except for a change in the identity of the business owners, the business will not usually change significantly as a direct result of a share purchase transaction.
The shares in the Target are transferred from the Seller to the Buyer by a stock transfer form, which is a simple document. The only assets that are actually sold in a typical share purchase transaction are the shares in the Target. There is no legal requirement for a formal share purchase agreement. However, except for the simplest of transactions, the Seller and Buyer will usually agree to document the change in share ownership by entering into a written share purchase agreement.
The terms of a share purchase agreement can vary considerably depending on factors such as the identity of the parties, the business sector and the nature and circumstances of the transaction. However, they are often lengthy documents dealing with such matters as price, payment terms, warranties, indemnities, limitations on liability, restrictive covenants, confidentiality and intellectual property.
Whilst they will often overlap, the acquisition of the shares of a private company may be divided into 5 distinct phases. These relate to transaction planning and preliminary issues, due diligence and investigation, the preparation and negotiation of the share purchase agreement (often referred to as the “SPA”) and ancillary documents, the completion phase, and, finally, the post-completion phase.
In most cases, it is likely that the Buyer and Seller will start by having informal discussions and negotiations regarding a potential share purchase by the Buyer of the Seller’s shares in the Target (or, alternatively, the purchase of the whole or part of the business of the Target from the Target). If the Seller is using a broker or agent, they may be involved at a preliminary stage.
Usually, the Seller will require the Buyer to enter into a confidentiality agreement (which is often also referred to as a 'non-disclosure agreement' or ‘NDA’) at a relatively early stage in order to try to protect the confidential and secret information of the Seller and the Target before the Seller provides information and documentation to the Buyer.
The parties may also enter into some kind of exclusivity agreement for a specified period of time in order to try to reduce the risk of the parties wasting time and costs whilst discussing and trying to conclude a share purchase transaction.
Once the parties have concluded their initial discussions and decided to proceed, they will usually record how they intend to proceed in broad terms by entering into heads of terms (which is often also referred to as ‘heads of agreement’, a 'letter of intent' (“LOI”) or a 'memorandum of understanding' (“MoU”)). The heads of terms will often contain a provision stating that they are not legally binding, except for certain provisions (for example, confidentiality, choice of law and jurisdiction).
To some extent, the Buyer will carry out due diligence and investigate the Target (and related matters) prior to any informal discussions with the Seller, through all phases of the transaction process and post-Completion.
The majority of the due diligence is likely to be carried out after the parties have signed a confidentiality agreement, heads of terms and, perhaps, an exclusivity agreement. In most cases, it will be conducted during the early stages of the transaction so as to ensure that the parties can negotiate appropriate warranty and/or indemnity cover in the share purchase agreement and determine what other steps need to be taken in connection with the proposed transaction and post-completion.
Typically, the due diligence process will involve matters such as the collation of information and documentation through the means of an initial due diligence questionnaire (“DDQ”) and subsequent supplementary questions; the reviewing of a large number of documents supplied by the Seller (often via an online Data Room), the carrying out of various types of investigatory searches and site visits. The extent and nature of due diligence can vary considerably depending on the circumstances.
The due diligence process will effectively continue during the negotiation of the share purchase agreement and related documents (in particular, as a consequence of any matters arising from any warranties and indemnities contained in the share purchase agreement, any tax covenant or indemnity and any disclosures contained in a disclosure letter).
The primary document in connection with a share purchase is usually the share purchase agreement. It is also usually the longest and most complicated document of all of the documents, papers and forms involved in a share purchase transaction and the most heavily negotiated. Typically, the share purchase agreement will act as an umbrella document for the entire transaction setting out the terms and conditions on which the share purchase is to take place, including (amongst other matters) the purchase price and payment mechanism, any conditions precedent to completion, any arrangements for completion, any post-completion restrictions, any warranties and indemnities, any limitations on the Seller’s liability and a list of all related documents, papers and forms to be completed and steps to be taken in connection with the share purchase agreement at and after completion.
The number of related documents, papers and forms to be completed and steps to be taken in connection with the share purchase agreement can be extensive. These may include a tax covenant, disclosure letter, deeds of contribution between selling shareholders, guarantees, loan note instruments, escrow agreements and retention arrangements, new articles of association, service agreements for continuing or new directors, settlement agreements, a shareholders agreement where there will be more than one Buyer (or a Buyer and some continuing shareholders) as well as board minutes, company resolutions and companies forms.
Importantly, whilst the share purchase agreement is usually the main document, the formalities of transferring legal title to the shares will be dealt with by the execution of one or more stock transfer forms (depending on the number of Sellers and categories of shares).
Usually, the exchange and completion of the share purchase agreement and related documents will take place simultaneously so there will be no time gap between exchange and completion.
Where completion is subject to any conditions (more commonly in larger transactions where some form of clearance is required), there may be a significant gap between the date of exchange of contracts and the date of completion. Completion of the share purchase agreement and related documents will then take place once the relevant conditions have been satisfied (or, in certain cases, waived). Where completion is non-simultaneous, the share purchase agreement usually contains provisions relating to the running of the Target between exchange and completion.
The share purchase transaction will, for the most part, be concluded at completion. The Buyer usually becomes beneficial owner of the Target company’s shares after all completion formalities (including payment of such part of the purchase price as is due to be paid at completion) have been completed or waived. However, it is important to note that transfer of the legal title to the Target company’s shares from the Seller to the Buyer will not be completed until any stamp duty has been paid, stock transfer forms have been stamped (where necessary) and the registration of the share transfer(s) and the names of the new shareholder(s) in the statutory books of the Target has taken place. That is a vital post-completion step.
The most important post-completion step is usually the payment of any stamp duty, the stamping of stock transfer forms and the updating of the statutory books of the Target.
Depending on matters such as the terms of the share purchase agreement (and related documents) and the nature of the business of the Target, there may be a number of other post-completion steps. These may include matters such as the preparation of Completion accounts or other calculations which may have an impact upon the share purchase price or any deferred consideration or clawback mechanism.
In addition, the Buyers will of course usually have a significant amount of work to do getting to know the Target and its business in detail at all levels whilst ensuring that they have purchased what they believed they were purchasing and that there are no grounds for warranty, indemnity or other claims against the Seller.
The documents required in connection with a company share purchase will vary depending on factors such as the nature and structure of the Target and its business, the identities of the parties involved, the circumstances in which the share purchase has arisen and the goals of the participants.
Share purchase transactions often involve a significant number of documents and ancillary papers. Depending on the circumstances, some of these may be long and take a significant amount of time to prepare and agree. The documents and ancillary papers to be signed and the steps to be taken by the Buyer, Seller and any other parties are often listed in a schedule to the share purchase agreement for ease of reference. Typically, the following key documents will be prepared and signed in connection with a company share purchase:
