Mergers and acquisitions
At Blacks Legal in Holborn, our corporate lawyers are highly experienced when it comes to advising clients on both purchases and sales of a business. We prioritise handling the intricacies of these transactions efficiently and effectively.
If you are looking to sell your business, we work diligently to ensure that you receive the best value for your business, whilst allowing you to continue your journey with peace of mind.
If you are looking to take over or purchase a business, we will perform a thorough due diligence process to help highlight and mitigate any potential risks. We work with clients across London and Essex. Get in touch today.
Buying or selling shares of a company
This guide will provide an overview of the process for the share buying and selling of a company.
However, every situation is different and it may be best to talk to an experienced Business Lawyer in the early stages of the process if required.
At Blacks Legal our experienced team of Commercial Business Solicitors provide wholesome advice to those interested in buying or selling shares in a company. Please call now for a no obligation initial consultation, or leave your details in the online enquiry form and we will call you back.
Preliminary stages
The first stage that the parties will undergo involves the consultation of the basic terms of the deal. This may be the parties consulting directly with each other, or even sometimes through an agent or broker. Once a basic agreement has been reached by both parties, they tend to set this out in a document which is described as a ‘’Heads of Terms’’
Heads of terms
The ‘’Heads of Terms’’ is the document that sets out the essential points the parties have agreed on. It will specify the shares being purchased, and how much they are being bought or sold for. The terms will also include any known important points during this stage, such as: any overdue payments of the price; if the seller might continue to work in the company as a consultant or employee; whether the price is reliant on the asset value or performance of the company; if the final price is to be linked to an “Earn out” mechanism.
The Heads of Terms are usually stated not to be legally required, excluding clauses relating to confidentiality and any “lock-out” provisions. Lock-out provisions are intended to stop the seller negotiating with any other forthcoming buyers for a fixed period of time, which allows the buyer to carry out all the required investigations of the business.
The benefit of the Heads of Terms is: they help to simplify the foundations of the deal to the parties. Potential “deal breakers” can be recognised and handled before the incurrence of any significant legal fees.
Therefore the preparation of the Heads of Terms is vital and must be thorough. The Blacks Legal team has an abundance of experience in negotiating and creating Heads of Terms for all kinds of deals.
Other considerations
The buyer ultimately inherits all the assets and liabilities of the company, when shares of the company are bought. There are also considerations for the employees, all occupied properties by the company and whether the company has had any past regulatory investigations.
The employees will remain with the company under their current terms and conditions. There could also be potential problems with the employees of the company, including onerous terms and conditions of employment, which could involve the eligibility and overdue payment of benefits or bonuses and thus, it is important to know the state of play at the outset.
The premises from which the seller trades from is another important issue that requires careful consideration. The buyer will need to consider and plan accordingly to know whether the company requires the premises. The seller will have a lease of the premises, or own the freehold of the premises. The buyer will need to look into the lease if the premise is occupied under a lease. This is to see whether the length of the remainder of the term needs a renewal, as well as any liabilities under the lease.
It is also important the buyer checks there are no change of control provisions in the lease. This is in terms of the ownership of the shares of the tenant company, and that consent to change of ownership is obtained, as this can give the landlord the right to terminate the lease.
Generally, enquiries and searches will need to be carried out when buying a property.
Blacks Legal’s Corporate & Commercial Team are aware of many ancillary issues, and we strive to guide you through the process as a buyer or seller.
Non-disclosure agreement
After the Heads of Terms have been agreed, the seller will obtain a non-disclosure agreement or confidentiality undertaking from the buyer. Sometimes the seller and buyer will enter into a Non-Disclosure Agreement and then Heads of Terms, if they want to discuss matters without knowing what the terms of the deal should be. After this stage is Due Diligence.
Due diligence
When the buyer of a company finds out all the information they would like to know about a company, this process is called Due Diligence.
A basic Due Diligence is usually completed by the buyer and they would have obtained various copies of accounts, contracts, marketing materials and other documents before informing their lawyers. However, one of the first things that the buyer’s lawyers will do is to prepare a detailed list of questions forwarded to the seller’s lawyers about the accounts, assets, affairs, financial / tax positions of the company. More often than not, they would answer the more technical questions but the majority would be answered by the seller, with the aid of the company’s accountant.
Usually the seller might think the buyer’s Due Diligence questionnaire contains somewhat irrelevant questions. However, it needs to be remembered that the lawyer is looking for detailed technical points that a layperson cannot be expected to appreciate and that may have a significant effect on the company, its assets or business.
The Due Diligence process is a constantly evolving one and very often the process raises questions of its own. It would thus be very unlikely for this process to end with the sending of the first questionnaire and the receipt of the answers.
It is very important that the parties and their lawyers keep a cautious record of the Due Diligence as the answers accompany large volumes of documents which will normally be referred to in the Disclosure Letter (see below).
The Due Diligence process mentioned here is the research carried out by the buyer into the affairs of the company. Many sellers underestimate the amount of management time that dealing with the buyer’s Due Diligence takes and it can be an unwanted distraction from actually managing the business. It also may involve the sellers having to run after documents and information from third parties. We advise that sellers, prior to actually putting the company up for sale, try their best to get as much information and documentation (such as material contracts) together at an early stage.
The share purchase
agreement
Once the buyer’s lawyer has prepared the first draft of the SPA, it will be forwarded to the seller’s lawyers as quickly as possible for review. It is particularly unlikely that the first draft will be the final draft and it is entirely normal for a SPA to go through a number of drafts before a final version is agreed. The reason for this is that - although the parties have entered into Heads of Terms - the first version of the draft SPA raises new issues.
The parties will put in detailed requirements regarding how and when the price is to be paid, the warranties the seller is to give (see below), how the sellers liability is to be limited (see below) and possibly non-competition provisions preventing the seller from competing in the future with the company they are selling.
It is common for the SPA to take several weeks of conciliation from first draft to the final agreed draft.
The warranties
The warranties are a detailed list of statements by the seller concerning the state of the company and its affairs, usually drafted in unqualified terms. The warranties relate to the seller’s legal ownership of the shares and their right to sell the shares, the accounting and tax affairs of the company, employment terms of the company’s employees, assurance that there are no current disputes or litigation involving the company, assurance that there are no problems with the company’s trading, details of all land and property owned or used by the company, and details of intellectual property (such as copyrights, computer software, trademarks etc) used by the company.
If anything goes wrong in the future, the warranties form the basis upon which the buyer has recourse against the seller. Therefore the buyer will want the warranties to be as comprehensive and detailed as possible, while the seller wants to give as few warranty promises as he can. Ergo the first draft of the SPA will contain powerful and extensive warranties. The seller can seek to reduce his exposure in a number of ways, by:
- Adjusting the warranty to something that is more satisfactory
- Deleting any warranties that are immaterial to the business and affairs of the company
- Limiting the scope of the warranty by a disclosure (see below)
The lengthiest part of the negotiation process is the negotiating of the final form of the warranties.
Although there are some standard warranties, the accurate form and details of the warranties will rely heavily on the result of the Due Diligence process. It is likely that the buyer will introduce new warranties at any time during the negotiating process, as information becomes available, given that the Due Diligence process is expected to be in progress while contract negotiations are developing. Besides warranties, a buyer might look for indemnities in respect of specific matters. An indemnity is stronger than a warranty as a warranty is a general statement by the seller that there is no specific problem. Therefore it is up to the buyer to find a problem. When a buyer identifies a problem, an indemnity is used, whereby the buyer looks for assurance from the seller that they'll make good any loss surfacing out of that specific problem on a £ for £ basis.
Along with the SPA, there is an additional document called a Disclosure Letter, which intends to limit the extent of the warranties.
The disclosure letter
The Disclosure Letter is a document signed by the seller where they set out matters that they know are at odds with the Warranties and thereby endeavour to qualify the Warranty. For example, if there is a Warranty that clarifies that the company is involved in no litigation but the seller knows that the company has a pending lawsuit, the Disclosure Letter will contain a “disclosure” referring to that lawsuit.
The idea of a Disclosure Letter is to surface any potential problems before the completion of the sale. If any losses occur as a result of ‘’disclosed’’ problems, the buyer will then lose the right to sue the seller, given that they have been completely and reasonably disclosed.
The Disclosure Letter allows the seller to eliminate or limit his liability in relation to problems that he knows exist, thus making it an extremely important document for the seller.
The Disclosure Letter is also important to the buyer as it causes the seller to bring the buyer’s attention to problems before he is committed to buying the company.
The buyer might seek an indemnity (see above) in respect of the specific problems disclosed, as particular indemnities would not be restricted by the Disclosure Letter. On the other hand, the buyer might choose to accept a disclosure and take the risk accordingly.
The buyer may seek to renegotiate the price or even pull out of the deal completely if a problem is serious enough.
The Disclosure Letter is not the only means by which a seller can limit their liability.
Limitation of the seller's liability
If there is a breach of warranty, the SPA will contain clauses limiting the seller’s liability to the buyer. Claims by the buyer against the seller will usually be limited in time. The time limit is likely to be adequate to allow the company at least a complete financial year after completion in respect of most claims. But generally the time limit is between one and two years which is long enough for the buyer to find any potential problems.
The tax authorities have the right to make a claim against the company for six years after the end of the relevant financial year, therefore tax matters are usually limited to six or seven years.
The SPA will usually contain a tax covenant, something sellers should be aware of, meaning the buyer will be responsible for tax of the company after completion. The seller will be responsible for the tax of the company before completion even though that completion may possibly run through a tax year or if there is unpaid tax.
If provisions have not been made for such tax by the company or they have failed to pay any tax due to prior completion, then this will be the seller’s liability. However the company will usually have made provisions for such tax.
In terms of financial value, the seller’s liability will also usually be limited. It is normal for the buyer to be able to sue the seller for the return of the purchase money only, or at times just a proportion of the purchase money.
The limitations in liability that are agreed regarding warranty claims may not apply in full or be so robust in relation to tax claims that they will often only be of limited scope in relation to indemnities (as opposed to Warranties, all which the seller must be aware of).
The matter can advance to completion, once the SPA is approved.
The disclosure letter
After signing the SPA, the close of the sale of the shares typically takes place at the offices of the buyer’s Lawyers. However, sometimes the SPA provides for a deferred completion to take place after a gap period. For example, where the SPA is conditional upon certain matters taking place before completion can take place.
A completion meeting will take place incorporating all sellers and buyers, their lawyers, and at times their accountants as well. This is where any final matters remaining to be decided on will be finalised. It will also be where the final drafts of the documents are prepared and where the parties sign all the SPA and ancillary documents.
Officers of the company being sold generally resign at the completion meeting and new ones will be appointed. The various company affairs arising out of completion will be dealt with in the board meetings and even shareholders’ meetings may be required. This is because it is common for the constitution documents (the Memorandum and Articles) of the company to require shifting as part of the deal process.
At the completion, all relevant company records and documents will be handed over and the money will be paid, generally by telegraphic transfer between the individual parties’ lawyers.
How Blacks Legal's corporate team can help
The consideration of business issues and even personal issues can make the sale and purchase of a company a prolonged and tense process. Our team will seek to manage the transaction of buyers and sellers so that much of the trouble and stress of the transaction is managed by us. Throughout the process, we will keep you updated with all the movement and important issues. At the onset of the transaction, we will agree with you how and where you wish us to report to you. Once we understand and have settled the extent of the transaction, we will concur a fixed fee.
It is fundamental you select legal advisers who are qualified and who frequently deal with company sales and purchases. It's also important that they're conscious not only of the legal issues but also any business and personal issues too. They're all integral to the process, whether you are buying or selling a company.
One of the first decisions you have to make when you are thinking of buying or selling a limited company, is to decide whether you want to sell or purchase the assets or the shares.
The new buyer takes ownership of the existing business during the share sale of a company and continues to run it with its employees and their contracts property intact. The owners of the company are replaced by the buyer and they become the shareholder and director. No third party involvement is required and there is also no transfer of company assets. As a result the buyer takes on liabilities such as company debt. When compared to an asset sale, the process and the documentation of the share sale will be more in-depth as the level of risk for the buyer is greater. To cover the buyer against any liabilities the company might have, the contract will require more guarantees and tax covenants.