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Share purchases - overview
A business may be acquired by one of two methods:
asset purchase, or
Under an asset purchase, the buyer selects the assets and liabilities it wishes to acquire from the seller and purchases them directly. Under a share purchase, the buyer takes over ownership of the company carrying on the business (the target), which comes with all of its assets, obligations and liabilities (whether or not the buyer was aware of them).
This overview provides an insight into acquisitions by private companies, made by way of purchasing shares by private agreement.
Choice of structure
A decision to proceed by way of share purchase rather than asset purchase will be influenced by an assessment of several factors, including:
the nature and quantity of assets employed in the target’s business
the difficulties associated with acquiring key assets individually (eg where third party consents may be required), and
the liabilities of the company and the tax treatment of the alternative transaction structures
A seller will generally prefer to sell shares rather than assets. A share sale relieves it of all liabilities (known and unknown) associated with the target. However, for an agreed period following the sale of the shares, the seller will remain liable to the buyer with respect to the target's business and affairs under the warranties and indemnities negotiated as part of the transaction and that will be subject to specific agreed limitations. By contrast, a buyer may prefer to avoid any risk of acquiring unknown or unquantifiable liabilities by careful selection of the assets and liabilities it will acquire. The relative bargaining power of the parties may be relevant.
Beginning the sale process
Negotiations for sale by private agreement may begin in many different circumstances. An owner may wish to retire from or otherwise realise the value of his business. Alternatively, a potential buyer may initiate an approach to the seller as part of its own expansion strategy.
Preparation for sale
If a seller decides to seek a buyer, he can take steps to prepare the target for sale and make it more attractive to potential buyers. Such steps may range from ensuring the target’s affairs are properly documented and all of its filings up to date, to hiving off that part of the business that is being sold into a new target company.
Before being provided with any information about the target (including its identity), a potential buyer should be required to sign a confidentiality agreement.
A potential buyer will wish to invest significant time and resources into investigating the proposed acquisition by way of due diligence and may ask for a period of exclusivity, during which it will be the only party with which the seller will negotiate.
Exclusivity may be granted in a stand-alone agreement, but is more commonly incorporated in a heads of terms, which may become appropriate when a preferred potential buyer has been identified by the seller and an outline commercial deal agreed in principle.
The potential buyer will carry out legal, financial and accounting due diligence into the seller and the target, in order to obtain information, inform its negotiations and plan for the integration of the target into its existing group.
The due diligence process is usually co-ordinated by the buyer’s solicitors. They will prepare a due diligence questionnaire and will be assisted by the buyer’s accountants and other appropriate professional advisers. Specialist advisers may be needed to help with:
intellectual property, or
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.
Share purchase agreement and disclosure letter
Although the formalities of transferring legal title to the shares will be dealt with by the execution of a stock transfer form, the seller and buyer (and any guarantor) will enter into a detailed share purchase agreement. This sets out the terms on which the sale is to take place, including:
price and payment, including any provision for earn-out consideration, payment by way of loan notes or share consideration, or the preparation of completion accounts
conditions precedent to completion, eg regulatory or third-party approvals, and the release of bank security over target company’s assets
arrangements for completion
post-completion restrictions on the seller
warranties and indemnities, providing for recourse by the buyer against the seller, and
limitations on the seller’s liability, including time limits for making claims and financial limits
The limitations on the seller’s liability under the warranties will include matters disclosed in a disclosure letter. This is negotiated alongside the share purchase agreement and given to the buyer at exchange of contracts, together with a disclosure bundle of documents supporting the matters referred to.
In addition to specific conditions precedent, a number of documents will be required to complete the share purchase, many of which will have been negotiated alongside the principal documents and rendered into an agreed form at exchange. These may include:
tax deed of covenant
stock transfer forms
power(s) of attorney from seller(s) to buyer pending entry of the buyer’s particulars in the target’s register of members
resignations of directors, secretary and auditors
new service contracts for key employees
board and shareholder approvals for the seller, buyer and any guarantor, and
completion board minutes for the target company, at which the transfer of its shares is formally approved
The buyer becomes beneficial owner of the target company’s shares after all completion formalities (including payment of any part of the price due at completion) have been completed or waived. 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)’ name(s) entered in the target company’s register of members.
After completion a number of matters will need to be attended to by the purchaser, including:
payment of stamp duty at 0.5% of the purchase price
filing notices of directors’, secretaries’ and auditors’ appointments and resignations at Companies House, and
integration of target into the buyer’s group, including VAT, payroll etc
The share purchase agreement itself is a private document and there is no requirement to file it with the Registrar of Companies. The only requirement is to notify the Registrar of the change of share ownership is in the target’s next annual return.
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