Orr Litchfield
Solicitors and Business Lawyers
Solicitors and Business Lawyers
When you sell your company, you will be selling the shares which you own in your company to a purchaser. Depending on the complexity of the transaction, there may be other important steps relating to the structure of your company and its business (eg hiving out parts of the business of the company pre-sale).
Where you are one of several shareholders, you may simply be selling your shares to one or more of the other existing shareholders, typically in accordance with pre-emption rights contained in the articles of association of your company. However, in many cases you (and your fellow shareholders) will be selling all of the issued shares of the company to a third-party purchaser.
The sale of any private company (and, similarly, the sale of a business) can be divided into 6 distinct phases, from the seller’s perspective – seller’s pre-sale due diligence, transaction planning and preliminary issues, buyer’s due diligence and investigation, the preparation and negotiation of the share sale and purchase agreement (“SPA”) and ancillary share sale transaction documents, the completion phase, and, finally, the post-completion phase. Often different phases overlap.
During each phase of any potential company share sale, it is important to keep focussed on the key reasons why you have decided to sell your shares in your company and to continually re-assess the merits of the transaction in terms of the proposed deal that has been struck.
In this article, we provide an overview of each of the above 6 key phases of a company share sale transaction for a seller. The second to sixth phases (inclusive) will also be important for a buyer. If you would like more details in relation to any phase of a company share sale or would like to discuss a potential or existing company share sale or business asset sale, please email us at enquiries@orrlitchfield.com, complete an Enquiry Form or call us.
Whilst a buyer is likely to carry out its own preliminary investigations prior to commencing initial discussions with the seller in relation to a company share sale, this phase is a potentially important period for the seller. The seller should start the process as early as possible.
Once you have made the decision to sell your company and identified your objectives and goals in relation to your company share sale, you should spend time fine-tuning your company and its business in order to enhance your chances of maximising your share sale price and minimising your risk on the sale of your shares in your company.
The fine-tuning process consists of four key stages:
1. Review Stage: Firstly, a diagnostic review of the company and its business dealing with all of the issues that are likely to arise during the share sale process.
2. Assessment Stage: Secondly, an assessment phase where each aspect of the company and its business which needs improving is assessed with a view to determining which weaknesses should become a target for pre-sale improvement.
3. Planning Stage: Thirdly, a planning phase during which a pre-sale improvement plan is created for each weakness of the company and its business that you intend to try to overcome prior to the sale of your shares in your company.
4. Implementation Stage: Fourthly, implementing the pre-sale improvement plan by taking such corrective action in relation to the company and its business as is appropriate in order to deal with any issues identified during the review.
One way of looking at this process is to consider what information and documentation a buyer is likely to require before making an offer to buy your shares in the company or as part of its due diligence exercise and what warranties, indemnities and guarantees a buyer may seek as part of the share purchase agreement. Hence, this process is often referred to as seller due diligence.
The parties will usually start the process in relation to the company share sale by holding initial informal discussions regarding the proposed transaction and key issues in relation to the company share sale. If the transaction is to proceed then these discussions will often result in the parties agreeing the basis of a deal on a largely informal basis. The parties will generally seek to record the broadly agreed deal terms in writing and will, consequently, sign heads of terms (which is often also referred to as a 'letter of intent' (“LOI”) or 'memorandum of understanding' (“MoU”)).
The heads of terms relating to the company share sale will often be expressed as being non-legally binding. The document simply acts as a record of the deal struck and allows the parties to set out their intentions and assumptions (especially in relation to the proposed share sale price, any other consideration and the deal value) at the outset, thereby providing a point of reference as the parties' positions change following due diligence enquiries and the negotiation of the share purchase agreement and related transaction documents.
The parties are also likely to enter into other documentation to establish binding provisions concerning confidentiality and, in some cases, exclusivity. These provisions are sometimes included in the heads of terms, but may also be dealt with separately in the form of a separate letter or agreement, particularly in the case of confidentiality agreements.
It is important to bear in mind that requests for significant changes to heads of terms, after they have been signed, can unsettle the other party and lead to distrust between the parties. Often this will make it more time-consuming to complete the company share sale or may even result in the collapse of a transaction. Equally, clear and well thought-out heads of terms can help make a transaction run smoothly from start to finish. Therefore, it is important to be clear as to the reasons for the transaction, identify potential risks and contact your professional advisers at an early stage.
Most of the Buyer’s formal due diligence in relation to the company will normally be carried out after the parties have signed heads of terms and a confidentiality agreement. The due diligence process will then run concurrently with the negotiation of the SPA and related share sale transaction documents. The majority of the due diligence should 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 SPA.
The buyer will conduct legal, financial and accounting due diligence into the target company and the sellers in order to obtain information, inform its negotiations and plan for the integration of the target company into its existing group. This involves instructing advisers to review and report on different areas, as appropriate. The buyer's legal advisers will therefore conduct legal due diligence, issuing a legal due diligence questionnaire and then reviewing the seller's replies and information supplied. Although the buyer’s advisers will report back to the buyer (and other advisers, as appropriate) throughout the process, they may also prepare a due diligence report (addressed to the buyer), which should highlight material issues arising from the review.
Due diligence must not be confused with disclosure, which is the seller’s principal means of protecting itself against potential liability for breach of warranty. The seller prepares a disclosure letter in which it will make a series of general disclosures (disclosures of certain matters in the public domain, searches and registers and groups of documents), as well as specific disclosures (meaning disclosures against specific warranties contained in the SPA). Both the general and specific disclosures are likely to be subject to considerable negotiation. Disclosure and due diligence are, however, interlinked processes and information gained in the due diligence process will help inform the disclosures made by the seller in the disclosure letter.
The legal due diligence process is usually co-ordinated by the buyer’s solicitors. They will work with the buyer’s accountants and other appropriate professional advisers (each of whom may end up reporting back to the buyer separately with their findings from the due diligence). Specialist legal advisers may be needed to help with a variety of potential specialist issues, such as pensions and environmental law.
During this phase, the main share sale transaction documentation will be drafted and negotiated. These are usually centred around the negotiation of the SPA. Although 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 shareholders and categories of shares), the parties will enter into a SPA, which can become a detailed and heavily negotiated agreement. This sets out the terms on which the sale is to take place, including the purchase price and payment mechanism, any conditions precedent to completion, any arrangements for completion, any post-completion restrictions, any warranties and indemnities and any limitations on the seller’s liability.
Preparation of a first draft of the SPA can begin at any time after the main commercial transaction terms have been agreed and the heads of terms have been signed. The due diligence and disclosure process will usually run concurrently with the drafting and negotiation of the SPA. The earlier that substantive due diligence is conducted by the buyer, the sooner the findings of the due diligence can inform the negotiation of appropriate warranty and indemnity cover in the SPA.
The drafting and negotiation of the tax covenant will usually commence once a draft SPA is in circulation (so that it can be referenced in the tax covenant and so as to ensure consistency of definitions and deal terms). Drafting of the ancillary documents will begin once negotiations of the SPA are fairly advanced, depending on which ancillary documents are required.
In addition to the SPA and tax covenant, it may be necessary to prepare and negotiate a number of ancillary documents in connection with the company share sale. These may include board minutes, company resolutions, deeds of contribution between selling shareholders, guarantees, loan note instruments, escrow agreements and retention arrangements.
Completion of the SPA will take place either simultaneously with signing and execution of the SPA, or at a later date. If there are conditions to completion, it will be at a later date (split exchange and completion) and if there are no conditions then completion will usually be simultaneous.
A company share sale will be concluded with completion. At completion, the requisite formalities to complete and implement the share sale transaction are undertaken. Both exchange and completion may occur either face to face or virtually (by way of telephone call and/or email).
The buyer usually becomes beneficial owner of the target company’s shares after all completion formalities have been completed or waived – this will usually include payment of the whole of the purchase price (or such part of it as is due to be paid at completion) by the buyer of the target company to the selling shareholders). Transfer of the legal title to the target company’s shares will not be completed until any stamp duty has been paid and the new shareholder(s)’s name(s) entered in the target company’s register of members.
The parties will need to ensure that they are each clear as to which documents must be prepared, negotiated, executed and handed over (as appropriate) at exchange and completion of the share sale. The SPA will normally include a list of documents that each party must execute and hand over at exchange and completion. However, it is also common to prepare a separate list of documents, by way of checklist.
The amount of work required to be carried out by the seller and the buyer following completion will vary considerably from transaction to transaction. Most of the tasks which fall to be done in the days following completion (and which will need to be done following completion of all share sale transactions) will be for the buyer's lawyers to undertake, given that responsibility for the target company's affairs passes to the buyer and its lawyers.
Depending on the valuation and consideration mechanisms used in the share sale transaction and set out in the SPA, there may be calculations, adjustments and payments to be made in the post-completion period (for example, if completion accounts are to be prepared or deferred consideration must be calculated). Much of the work in these circumstances will fall to the buyer's accountants and the buyer itself rather than the lawyers, unless there is a dispute between the buyer and seller. However, the lawyers for both buyer and seller are likely to be involved if the buyer makes a warranty or indemnity claim.
You can read more about selling your company or business on our dedicated page on Selling a Business or Company.
You can read more about the process of selling your company on our dedicated page on Share Purchases & Sales.
Whatever stage of the process you have reached, we can help you to to plan, prepare, negotiate and complete your company share sale or business sale in a way that is right for you and your company.
If you would like more information about selling a company or business or would like to discuss your company or business or a potential or existing company share sale or business sale, please email us at enquiries@orrlitchfield.com, complete an Enquiry Form or call us.
