In this blog we look at the sale of the entire share capital of a limited company. Selling a company can be stressful for both the Seller and the Buyer. Below we look at the key parts of the transaction, identifying what is required and the importance of each step.
Once an offer in principle has been agreed between a Buyer and Seller, both parties should instruct a lawyer. Often these are recommended by accountants or agents, but so long as the lawyer has experience dealing with transactions relating to the entire share capital of a company, any lawyer can be instructed.
Heads of Terms
Following instruction, the next step is to agree the Heads of Terms (HOTs). Sometimes these are drafted before instructing a lawyer, but in nearly all transactions, HOTs are finalised once reviewed, agreed and amended by the lawyers. The HOTs are an agreement in principle, outlining the key terms of the deal. An anticipated Completion date is usually listed within the HOTs and this is the basis of how the transaction will work. Most of the terms within the HOTs are not legally binding (enforceable), other than four sections. These are:
- Costs; and
- Governing law and jurisdiction.
Reference to the HOTs is made throughout the transaction, to ensure the transaction documents being entered into cover the terms that were agreed within the HOT’s.
After the HOTs are agreed and signed by both parties, a confidentiality agreement or NDA is drafted ahead of the next step, due diligence.
The Buyer’s lawyers will draft a Legal Due Diligence Questionnaire (LDDQ). The LDDQ sets out the areas of investigation and list of questions and enquiries relating to the Company being sold. These are then put to the Seller. The Seller will draft responses and collate evidence in support of their responses. These responses will help the Buyer understand the business of the Company and draw out any potential risks that may arise or affect the transaction. The supporting documentation provided during the initial due diligence process is usually redacted, to hide any personal details of employees, customers, and suppliers. The supporting documentation will be uploaded to a virtual data room which is usually set up by the Seller’s lawyers. This will be set up with folders to correspond with each section of the LDDQ. Reference should be made within the LDDQ responses as to where supporting documents have been uploaded, and what they are named. By clearing detailing this, it is less likely further questions for the same information will be raised by the Buyer.
The Buyer will also be expected to perform searches of public registers, including but not limited to, Companies House, the ICO register and the Land Registry.
When the initial due diligence has been uploaded to the Data Room, the Buyer’s lawyer will review the responses and supporting documents and provide the Buyer with a Legal Due Diligence Report (LDDR). The LDDR provides the findings of the due diligence and sets out a plan of action for the Buyer to undertake pre and post Completion. It will also detail any concerns the Seller should be aware of and allows the lawyers to determine whether any added protection is needed for their client.
In nearly all transactions, there is more than one round of due diligence, with additional enquires being sent to the Seller throughout the transaction. Each time the responses are provided, the Buyer’s lawyers will review the information and update the LDDQ accordingly.
Alongside the due diligence, the main transaction documents are the Share Purchase Agreement (SPA) and the Disclosure Letter. These are drafted and amended throughout the transaction, until agreed by both parities ahead of Completion.
This is a formal contract setting out the terms and conditions of the transaction. Both parties must be listed as a party and once signed, they are bound by the contents. Other parties may also be a party to the SPA and this often includes Warrantors or Guarantors.
The document will be very detailed with a number of Schedules attached to it. It outlines the transaction price, how the payment is to be made and when, any warranties and/or representations made by the Seller to the Buyer, and any indemnities made by the Buyer to the Seller. There will also be separate sections to deal with tax warranties and the tax covenant which should be considered by the Seller and Buyer’s accountant and/or tax advisors.
The SPA is a technical document which protects both parties and ensures the transaction is unambiguous.
The initial SPA is usually drafted by the Buyer’s lawyer. It is for the Seller’s lawyer to review and advise the Seller of any amendments and/or points which should be removed. The SPA will often have several drafts and once agreed by all parties, an engrossed version will be produced for signing.
A Disclosure Letter is prepared by the Seller to identify and make known to the Buyer any exceptions to the warranties that are given by the Seller in the SPA. It is commonly divided into two parts:
- General Disclosures – these cover certain matters which appear in public records and/or of which the buyer (arguably) ought to be aware on the basis of pre-contract enquiries or searches actually made, or which a Buyer would normally make; and
- Specific Disclosures – these specifically disclose actual matters which, if not disclosed, would or might constitute a breach of warranty. The specific disclosures are made by reference to the warranties themselves. For example, against a ‘no litigation’ warranty, the Seller would need to disclose details of any current litigation affecting the company.
The Disclosure Letter will have attached to it a Disclosure Bundle. The Disclosure Bundle is made up of copies of the documentation being disclosed. Although much of the same information is covered in the Disclosure Letter and Due Diligence processes, these are two separate processes and as such, there should be no reference made to the Data Room and/or the LDDQ.
In order to draft the Disclosure Letter, the Seller’s lawyer will arrange an initial warranty call to go through the warranties that are documented within the SPA. Each warranty is a statement of fact, and any statement of fact which is not correct must have a disclosure against it to explain why it is not factually correct. The call is often also attended by the Seller’s accountant to comment on the warranties relating to the accounts, the tax warranties and the tax covenant.
If a warranty is breached because a disclosure has not been made when the warranty was not factually correct, the Buyer will have an opportunity to make a claim and seek compensation directly from the Seller. The Seller will be personally liable to pay compensation, not the Company that was sold. However, by disclosing against the warranties, the risk is put back on the Buyer and no claim can be made as the Buyer is deemed to have known. In some circumstances it is possible to take out an insurance policy to protect against both warranties and indemnities in order to mitigate a Seller’s exposure to potential claims.
As with the SPA and other transaction documents, the Disclosure Letter usually has many versions and once agreed, a final form will be delivered to be signed on Completion.
Alongside the drafting of the SPA and the Disclosure Letter, the Buyer’s lawyer will draft the initial ancillary documentation. The ancillary documents are listed in a List of Documents to help keep track of the documents and include (but are not limited to) the following:
- Buyer board minutes;
- Target board minutes;
- Stock transfer forms;
- New share certificates;
- PSC notification – ceasing to be a PSC;
- PSC Notification – being appointed a PSC;
- Waiver of claims;
- Directors’ resignation;
- Directors’ consent to act;
- Settlement Agreements;
- Consultancy Agreements;
- Indemnity of lost share certificates / original share certificate for the shares being sold; and
- Deed of assignment.
As with the rest of the transaction documents, these may not be agreed from the outset, and may also need amending as the transaction progresses. Once agreed, the Buyer’s lawyer will send out a full suite of engrossed ancillary documents and send this to the Seller’s lawyer.
When the parties are nearing Completion and the documents are ready to be signed, it should be checked how the documents will be signed. As not all clients are local, most of the time, an online electric signing programme is used to upload the Completion documents for the parties to sign. If both parties are using an online signing platform, this will be set up by the Buyer’s lawyer. If one party is signing in person, via ‘wet ink’, the other party should ensure there are counter-part provisions within all of the relevant transaction documentation.
Several of the transaction documents require signature by a deed. These documents require a witness. A witness should be independent, and not a close relative / someone living at the same address. They must be present as the documents are signed, as they are witnessing to say they have watched the signing of the documents.
Once documents have been signed, they will be checked by each lawyer. Should the transaction be relying on counterparts of the documents, the signed (but undated) documents can be sent to the other parties’ lawyers, but should be held to order, pending Completion. When both lawyers are happy the documents have been signed correctly, they will arrange a call to Complete the transaction. The transaction documents will then be dated, and the Seller’s lawyer will collate a Transaction bible with all signed and dated (engrossed) documents, which will be sent out to all parties.
Post-completion, there are several deliverables that need to be completed. These will be documented within the SPA and the Documents List. The web-filing code for filings at Companies House will be provided to the Buyer’s lawyer so that all relevant filings can be made. Should the deliverables not be completed, there will be a breach of the SPA and damages for a breach of contract may be possible.
At Clarke & Son we deal with both the buying and selling of a Company (as well as the business and asset sale of a business). Should you be looking at selling or buying a business, please get in touch with our Corporate & Commercial team for a discussion as to how we can assist you.