Share acquisitions: overviewWhen acquiring shares in a private limited company, there are a number of procedural steps a buyer will go through, including structuring the transaction, putting in place preliminary agreements with the seller, carrying out due diligence, negotiating key transaction documents and finally, signing and completing the acquisition.The share purchase agreement will be the principle agreement setting out the terms of the acquisition. This note includes links to share purchase agreements for different types of seller(s), together with links to standard clauses and other key transaction documents.
A prospective buyer may enter into a number of agreements with the seller before the parties begin detailed negotiations relating to the share purchase agreement.
Sellers will usually require a buyer to sign a confidentiality agreement, agreeing to keep all information about the target company that is disclosed to the buyer confidential. It is also common for the key terms of a transaction to be set out in a non-binding heads of terms or letter of intent. Provisions regarding exclusivity and break fees may be included in a heads of terms or in a stand alone agreement.
In an auction sale, the seller will usually send a process letter to prospective buyers, setting out the timetable and procedure for submitting offers to the seller. Usually, the process letter will be accompanied by an information memorandum, which includes key information about the target business.
Due diligence is the information gathering process carried out by a prospective buyer to find out as much information as possible about the target company early in the negotiations.
Legal due diligence will often involve a lengthy questionnaire from the buyer’s solicitors requesting information from the seller. The buyer’s solicitors will then prepare a legal due diligence report for the buyer, highlighting any potential legal issues. The buyer will be particularly interested in issues that potentially affect the value of the company it is acquiring, for example, large potential pension or environmental liabilities.
On larger transactions and auction sales, it is common for sellers to set up a data room containing information about the target company for buyers to access when conducting due diligence. The data room may be a physical data room, although it is increasingly common for sellers to use an on-line data room that allows prospective buyers to access materials via a website.
Share purchase agreement
The share purchase agreement is the principle contractual document which sets out the terms of a share acquisition.
The private share acquisition materials include a short-form share purchase agreement and different versions of a long-form share purchase agreement for use where there are multiple individual sellers or a single corporate seller, and where signing and completion happen simultaneously or where there is a gap between signing and completion.
There are also different versions of the share purchase agreement for use on intra-group transactions and auction sales.
A number of standard clauses are available (for example, completion accounts, locked box, anti-embarrassment and material adverse change clauses) which can be used along-side the standard form share purchase agreements.
Other transaction documents
On most private company share acquisitions, the disclosure letter will be a key transaction document and will usually be heavily negotiated.
Other agreements that may be relevant for private company share acquisitions include a deed of guarantee and indemnity, contribution agreement and loan note instrument.
It is possible that signing and completion may take place on the same day, or there may be a gap between signing and completion of the acquisition to allow time for conditions to be fulfilled.
As a matter of good corporate governance, the board of directors of the buyer and the seller should hold meetings to approve the terms of the acquisition before the share purchase agreement is signed.
Completion and post-completion
On completion, the buyer will pay the purchase price and will become the legal owner of the target company.
Board meetings are usually held at completion by the buyer, the seller and the target company.
The terms of the share purchase agreement will require the seller to deliver a number of documents to the buyer on completion. These may include share certificates (or an indemnity for lost share certificates), letters of resignation from the directors, secretary and auditors of the target company, and documents relating to any purchase price retention (or escrow) arrangements.
Post-completion, the buyer will need to pay stamp duty on the purchase price for the shares (see Tax, below), make any necessary announcements and filings and deal with other administrative matters.
Tax is a key consideration when structuring a transaction. A buyer will usually require protection against potential tax liabilities in the form of a tax covenant and tax warranties in the share purchase agreement.
Practical Law Company 24.11.2010