Parties
The forms of share purchase agreement used in England and Wales are broadly similar to those used in Ireland. Typically the share purchase agreement (SPA) is entered between a buyer and seller of the share capital of a target company. The seller’ parent company or an additional independent person may be required as a party to guarantee warranties and promises made on behalf of the seller. The buyer will want “come back” or recourse against a company with the means to meet claims such as the parent company or other substantial company.
The seller will not usually need a guarantee as it will receive the purchase monies on completion. However, if there is an element of deferred consideration, the seller may require a guarantee or security by way of lodgement of money with an independent reputable third party.
Where there are multiple sellers (e.g. where the shares in a private company are held by a number of parties) each will usually enter the agreement to sell the shares in the target company. The holders of small numbers of shares, particularly those who are passive investors, will not wish to give detailed warranties in relation to the company. The target company itself and other subsidiary companies which it may own, may, but usually will not be party to the agreement.
Sometimes, the target company will not hold all of the assets that are to be purchased. It may be necessary to transfer assets from other companies within the seller’s group of companies in advance. This may be undertaken upon or before completion.
Share Transfer
A key provision in the SPA will be the provision providing for purchase and sale of the shares. In England and Wales, legislation has modernised rules in relation to transfer of property. The insertion of certain short form words imply certain guarantees. It is usual to sell shares with “full title guarantee”.
The transfer of shares with “full title guarantee” implies certain guarantees in relation to the vendor’s title or ownership of the shares. It also implies the seller will do everything necessary to give effect to the title it purports to give. It does not imply the sale is free of charges, incumbrances or adverse rights about which the seller knows nothing and can not be reasonably expected to know. This limitation is usually excluded as the purchaser will want an absolute guarantee.
Most SPAs are signed and completed i.e. shares exchanged for purchase monies simultaneously. If there is a gap between signing and completion, the agreement becomes significantly more complicated. This is because it is more likely that something will have happened which affects the basis upon which the agreement has been negotiated. Sometimes, it is necessary to have this gap to deal with regulatory conditions such as third party’s or regulatory body’s consent.
Pre-Conditions
Conditions precedent are pre-conditions to the sale. They must usually be satisfied before the obligation to purchase arises. There will generally be a limited period in which the conditions must be satisfied.
Where a seller or buyer is part of a group of companies whose parent is listed on the London Stock Exchange, Listing Rules may require the consent of the parent shareholders to the sale.
If the sellers are taking shares or loan notes instead of cash, tax clearance may be required in order to qualify for roll over relief and defer the capital gain tax charge that would otherwise arise. Roll over relief on a paper transaction has been abolished in Ireland.
Some transactions may require “mergers” consent. The buyer bears the entire risk under English law. Where there is a qualifying merger the buyer can be required to divest the target company or any part of it. If there is concern that the transaction may be so significant as to have a European Community dimension, it would be necessary to put in a condition requiring merger clearance from the European Union.
Consideration
Consideration is the purchase price for the shares. The most common form is cash. Sometimes, shares in the buyer or some form of debt is issued by the buyer or a combination. Where the purchase price is determined by reference to future performance, there is a so called “earn out”. The agreement should set out in detail, the conditions under which the obligation to pay applies and the calculation of the amount. A price can be fixed or can vary depending on net asset value or earnings per the account.
Commonly, the parties agree a sale price on the basis of a particular net assets position. There will then be a subsequent adjustment after the date of completion. Completion accounts will be necessary so as to deal with the adjustment. Security may be required by way of a retention of a certain sum to deal with the adjustment.
The retention will usually allow the buyer to set off any balance due against a claim under an indemnity or warranty on the seller. There will usually be a mechanism to determine the adjustment from the provisional price to the final price. Certain time limits for the preparation of completion accounts will apply. One side’s accountants will typically prepare the draft accounts and they may be referred to an independent accountant, who will determine the matter, in the absence of agreement. The basis of computation of the completion accounts should be out e.g. the applicable accounting principles for items whose proper treatment may be debatable.
Restrictive covenants
A buyer of a company will normally be concerned to ensure that the seller and person connected with him or it, will not establish a competing business which diminishes the value of the newly acquired company. In the absence of provision in the agreement, the Courts will imply certain restrictions but these would not usually be regarded as sufficient. The restrictions implied would prevent the seller soliciting business of old customers, using business secrets or claiming to represent the sold company.
The common law implied restrictions are limited and may be uncertain to apply to the circumstances. It is usual to insert detailed restrictions on both the seller and persons connected with the seller. These restrictions prohibit them from in any way soliciting existing customers, suppliers or employees or competing with the target company for a period.
As in Ireland, a restriction has to be reasonably related to a legitimate interest, in this case the protection of the target company’s goodwill, in order to be valid. Restrictions that are deemed to be wider than necessary to protect this interest are potentially invalid under English common law. Generally, under UK Competition legislation a three year non-compete clause would generally be acceptable, where knowhow or goodwill has been purchased.
It is vital to ensure that the limitations in relation to the restricted activities the extent of the geographic area and duration are reasonable so as to protect the buyer but at the same time, do not unduly restrain the seller beyond what is necessary.
Warranties and Disclosure
The general principle under English contract law is that the buyer must beware. The value of a company may be undermined by risks created by the past decisions of the controller. For this reason, it is essential that “due diligence” investigations are made and that warranties and indemnities are given by the sellers promising and confirming the truth of a very wide range of key matters which affect the value of the company. Warranties also serve as a way of soliciting key information from the seller. A typical SPA can comprise 30/50 pages of warranties or more.
As part of the legal due diligence (the investigation) process, a disclosure letter will be prepared by the sellers setting out certain limitations of or deviations from the warranties. This is a useful mechanism for allowing the buyer to determine whether the deviations from the assumed position are serious enough to justify a price reduction or the abandonment of the transaction.
The warranties deal with a wide range of compliance matters which a buyer would deem desirable or necessary. If the due diligence process or disclosure discloses a very serious matter, the purchaser may simply accept it and “walks” from the deal or negotiates some kind of indemnity or specific comfort.
In order to reverse the buyer beware “default” position, there may be a warranty that all necessary information that ought to be provided in order to provide a proper assessment of the target company, has in fact been given. There is another similar warranty to the effect that the seller knows nothing which would affect the buyers decision to acquire the target group. The seller will often seek to reject clauses of this nature, as too wide.
Limitation of Warranties
A seller will usually seek to limit the extent of its liability on warranties. The general principle is that a breach of a warranty makes a seller liable to compensate the purchaser for the direct loss suffered. This would usually be measure in terms of a loss in value of the shareholding.
Most SPAs exclude small claims and also provide an overall threshold of loss which must be suffered before a claim can be made. There is usually a cut off period for making a claim on a warranty of between two and three years. There is usually a cap on the total liability which is often the amount of the price paid. Sometimes the sellers will seek to limit liability to matters within the knowledge of certain individuals.
Where there are multiple sellers, a seller may seek to limit liability to a particular proportion. In some cases, non-controlling shareholders, who have not been involved in managing the company, may succeed in negotiating that their warranties are limited to having good title to their shares. They would not usually be expected to give warranties in relation to the company itself.
A seller will seek to have conduct of certain claims which may later arise so as to ensure the buyer does not unnecessarily settle the claim in a manner adverse to the seller’s interest.
Completion
The SPA normally sets out what has to be done upon completion. Typically this will involve delivery of assets company books, share transfer forms. It will also involve resignation of existing auditors and directors and the holding of meetings to appoint the new controller. Bank mandates will need to be changed.
Stamp duty is payable in England and Wales at 0.5% of the consideration payable.
