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:
Discussions and negotiations in relation to company share purchases usually involve the parties exchanging highly sensitive business information, particularly in relation to the Target company and its business. The existence and nature of any discussions is also likely to be sensitive and the Seller and Target in particular may not wish others (for example, employees, customers and suppliers) to know about the potential change of ownership prior to exchanging and/or completing a share purchase agreement with the relevant Buyer. At that stage, the parties will typically make a formal announcement in an agreed form. Accordingly, as stated above, the Seller will usually 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 any discussions.
Confidentiality agreements are sometimes mutual in nature requiring both parties to keep information confidential. In any event, they are important documents and the parties should take proper legal advice before entering into a confidentiality agreement to ensure that they are adequately protected and their obligations under the confidentiality agreement are practical and reasonable in the circumstances.
The first 4 phases of the acquisition of the shares of a private company (transaction planning and preliminary issues, due diligence and investigation, the preparation and negotiation of the share purchase agreement and ancillary documents, and the completion phase) culminating in completion will often involve a considerable amount of time, effort and money on both parties, but particularly the Buyer. It will also distract the Buyer from carrying out its usual business activities.
In order to try to reduce the risk of the Buyer wasting such time, effort and money, as stated above, the Buyer may wish the Seller to enter into an exclusivity agreement for a specified period of time to enable it to try to conclude a share purchase agreement (and related agreements). During that period, the Seller will usually not be able to negotiate with or take active steps to find other prospective buyers of the Target or its business.
Exclusivity agreements can be prepared as stand-alone documents. However, they are sometimes included in the heads of agreement or even the confidentiality agreement.
Heads of agreement, heads of terms, letter of intent and memorandum of understanding are essentially interchangeable names for the same document. They set out the key terms of the overall agreement between the Buyer and the Seller in relation to the proposed share purchase of the Target.
The agreement is usually stated to be non-binding except for a limited number of clauses such as those relating to interpretation, notice, governing law and jurisdiction. It may also be conditional on a number of factors, for example, further due diligence. However, it is important to bear in mind that heads of agreement are usually intended to act as a framework for the preparation of the share purchase agreement and other core documents relating to a transaction and the steps to be taken by the parties to conclude the transaction. Accordingly, their contents need to be considered carefully. It can be difficult to justify significant changes to heads of agreement once they have been signed unless there has been a material change in the circumstances relating to the transaction.
The due diligence questionnaire is usually a key part of a Buyer’s due diligence investigation into the Target company. It is often referred to as the ‘DDQ’. Typically, it is a lengthy document containing a long list of questions relating to the Target company and numerous requests for information and documentation. It is normally sub-divided into categories by a number of different headings (for example, corporate structure and records, accounts and reports, assets, intellectual property, litigation, employment and other matters).
The Seller’s responses to the initial due diligence questionnaire may result in subsequent supplementary questions. Any documents requested by or on behalf of the Buyer will usually be placed in an online Data Room unless the number of documents is very small.
The Buyer and its advisers will usually wish to investigate the Target company as thoroughly as possible before the Buyer commits to purchase the shares in the Target company from the Seller by completing a share purchase agreement and related documents. They will utilise the Seller’s responses to the initial due diligence questionnaire and the information and documentation disclosed with it by the Sellers, amongst other matters, to obtain a better understanding of the Target company and its business, to identify any potential issues and to verify the Buyer’s reasons for seeking to buy it and the price which the Buyer intends to pay for it.
Preparing sufficiently detailed and accurate responses to the initial due diligence questionnaire and locating the information and documentation requested by the Buyer and its advisers is often a time-consuming exercise. The extent of due diligence questionnaires and the work and time involved in responding to them by the Seller and its advisers is often underestimated by the Seller. Similarly, the work and time involved in reviewing the Sellers responses and the information and documentation disclosed with it by the Sellers is often underestimated by the Buyer.
Ideally, the Seller should prepare for the Buyer’s due diligence by carrying out its own review before seeking to sell the Target company. Seller due diligence is likely to cover a wide range of matters, including improving financial reporting, ensuring accounting and tax records are up to date, reviewing customer and supplier contracts and securing any key contracts, reviewing and protecting any intellectual property, assessing human resources issues and securing key employees, addressing any property related issues and dealing with any governance, licensing and regulatory issues. Amongst other matters, carrying out Seller due diligence is likely to enable the Seller to deal with the Buyer’s due diligence questionnaire and related matters more easily and show to the Buyer that the Target company is efficient, organised and well-run.
The share purchase agreement is usually the most important document in relation to the sale and purchase of shares in a company. It is often referred to as the ‘SPA’. It sets out the terms and conditions on which the Buyer will purchase some or all of the Seller’s shares in the Target company.
There is actually no legal requirement for the Buyer and the Seller of shares to enter into a share purchase agreement when the Seller is selling shares in the Target company to the Buyer. However, as such transactions are usually important to the parties for a variety of financial and other reasons, it is sensible for the Buyer and the Seller to set out the terms and conditions relating to the acquisition in a share purchase agreement in writing. It acts as a written record of what the parties have agreed and therefore provides an important level of clarity and certainty for the Buyer and the Seller, particularly if any disputes arise after the completion of the share purchase agreement by the Buyer and the Seller.
In most share purchase acquisitions, the share purchase agreement is the longest and most heavily negotiated document. It is normally sub-divided into 2 main sections. The front part of the document will usually include various terms and conditions sub-divided by a number of different headings (for example, clauses relating to the purchase price, completion, warranties, indemnities, restrictive covenants and confidentiality). Typically, the back part of the share purchase agreement will include a number of different schedules to the front part of the document relating to such matters as particulars of the Target company, its intellectual property, information technology and real properties together with a long list of warranties to be provided by the Seller to the Buyer (for example, corporate structure and records, accounts and reports, assets, intellectual property, litigation, employment and other matters).
In most share purchase acquisitions, the share purchase agreement will contain a number of warranties (and, probably, representations and indemnities) given by the Seller to the Buyer in relation to the Target company and its business, assets and liabilities. Where this is the case, the Seller’s solicitors will usually prepare a disclosure letter which qualifies the warranties (and, probably, some or all representations and indemnities) given in the share purchase agreement.
The Seller’s primary purpose of making disclosures in a disclosure letter is to exclude or limit the Seller’s risk of a successful breach of warranty claim by the Buyer under the warranties in the share purchase agreement where a warranty turns out to be untrue. In addition, from the Buyer’s perspective, it supplements the due diligence exercise in providing a complete picture of the Target company and its business, assets and liabilities.
As the warranties in the share purchase agreement are often extensive, the disclosure letter is also often a lengthy document. Typically, it is divided into 2 or 3 parts. Usually, the first section includes a number of general disclosures and the second section includes a number of specific disclosures, which commonly relate to specified warranties. Often there is a third section which includes a list of the disclosure documents (which may replicate the list of documents in the Data Room, where one is used).
The disclosure letter will be an important document given its relationship with the warranties, representations and indemnities. Accordingly, it will also usually be heavily negotiated between the parties and their advisers.
Whilst the share purchase agreement is usually the main document in a share purchase acquisition, the formalities of transferring legal title to the shares will usually be dealt with by the execution of one or more stock transfer forms (depending on the number of Sellers and categories of shares).
The Companies Act 2006 provides that a company can only register a transfer of certificated shares if a 'proper instrument of transfer' has been delivered to it. The most common form of legal instrument used to transfer shares in a company is a stock transfer form set out in Schedule 1 to the Stock Transfer Act 1963 (as amended).
There are some circumstances in which a different form of legal instrument is required or where an alternative form of legal instrument can be used to transfer shares in a company rather than a stock transfer form. However, it must be a document capable of attracting stamp duty.
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.
Stamp duty is a statutory tax payable on certain documents. This includes legal instruments relating to the transfer of shares in a company where the consideration is over £1,000. The applicable rate is 0.5% of the consideration (usually the share price), rounded up to the nearest £5. Where the consideration is certified to be £1,000 or less, the instrument is exempt from stamp duty.
