Solicitors for a share purchase agreement
Share purchase agreements are often complex documents which can become lengthy and create significant delay, friction and cost if not dealt with by experienced, business minded and practical solicitors for both buyer and seller. Ultimately, good solicitors must understand that the cost of advice and risk assessment must be proportionate to the overall value and risk of the transaction.
For the purpose of this article we use the term share purchase agreement and share sale agreement interchangeably. The use of each term only denotes whether you look at things from the buyer or seller perspective.
Many of the problems associated with such share sale agreements and sales of companies arise in the area of warranties.
Entire share capital or investment?
Typically when thinking about share purchase agreements we think of another business or individual buying an entire business in the form of buying all shares in a company but this is not necessarily the case. Even where there is agreement in principle, things can be complicated where there are several shareholders in the selling entity. they may be on board to begin with but things can change.
So, there are many variables with share purchase or sale agreements. among the most important relate to payment for shares and legal issues may include :-
- when is payment due and will some be withheld? If so, what are the terms of any retention or earn out?
- are any of the selling shareholders critical for the future of the business? If so, how can they be compelled to stay on after sale?
- concerns about selling shareholders competing after sale – restrictive covenants are important. Financing the purchase – will it be paid for in cash, shares or debt or a mix of these?
Who owns what?
Remembering that there is often a choice and a negotiation over whether it’s better for either or both parties to buy/sell assets rather than shares and that a corporate entity is separate legally from it’s owners, it’s essential to be clear about what assets and liabilities are owned/owed by the limited company. An increasingly difficult and complex area in this respect is intellectual property (IP). Don’t assume that when buying a company that it owns IP such as website domain, website, social media accounts, inventions, database and so on. You may find that shareholders or even employees in fact own IP associated with and critical for the business. The share sale agreement needs to be clear on this and due diligence comprehensive and accurate.
Why are warranties so problematic with share purchases?
Under the English legal system, the onus is fully on the buyer to undertake appropriate due diligence before completing a corporate transaction.
In many cases, the buyer, even after significant investigation and enquiry of the seller, cannot be 100% satisfied and warranties enable the buyer to included in the share purchase contract factual statements by the seller, in the form of warranties, that can be acted upon if incorrect. From a seller’s perspective, they may argue that certain issues they are being asked to warrant are not factual statements or within their control, and hence they will resist giving warranties or will seek to place a cap on the value of claims or time limit potential claims.
Commonly, warranties relate to :-
- Accuracy of information provided
- Contracts or licence arrangements
- Litigation and disputes
- Ownership of assets
- Employee related issues
- Corporate tax issues
- Disclosure letter
To protect the selling shareholders position where there are factual issues or uncertainties where the sellers want to be clear that they have clearly disclosed the position such that the buyer should not be entitled to take action for breach of warranty in the future, a disclosure letter is often used.
Other key clauses in share purchase agreements
The indemnities section exists to protect the buyer. If any issues arise, the buyer can seek indemnities from the seller to cover any losses suffered relating to the issue indemnified.
Restrictive covenants are often imposed on the individual shareholder sellers have to be drawn up very carefully by solicitors in order to make sure that they will be admissible in court. The purpose of this section of the agreement is to prevent the seller from any further intervention into the business after the transaction has been completed.
A restraint of trade clause may also be included, which prevents the seller taking up related or competing business either geographically nearby or within a set period of time, or both. The nature of the clause depends entirely on the individual circumstances of the sale.
Some other features that may be required include the deed of tax covenant, to determine how tax will be paid; information about how the purchase price will be met; and completion matters.
Practicalities and other important points to note
The share purchase agreement is usually drawn up by the seller’s solicitor, although this is not necessarily a requirement, in particular where the shares have been sold by auction. While the buyer’s solicitor will try to protect the buyer as much as possible, the interest of the seller’s solicitor is to minimise this protection, in particular by limiting liability for misrepresentation. However, in practice, where misrepresentation is fraudulent, liability still applies, so such clauses may be acceptable to the buyer since they are invalidated in case of fraud.
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