Share Purchase

A share purchase is a type of corporate transaction where a buyer acquires shares (which can be the entire issued share capital or a part of this) in a company which is carrying out the target business. It is a complex transaction where both the buyer and the seller’s solicitors work together to reach a mutually agreeable solution for both parties.

It can be split up into the following broad stages:

• Dealing with pre-contract documentation, such as the heads of terms;
• Carrying out the due diligence exercise on the company the buyer wishes to purchase the shares of;
• Drafting and preparing documents such as an SPA (Share Purchase Agreement) to document the transaction as well as all ancillary documents to effect this;
• Ensuring all third part consents and approvals are obtained;
• Signing and completing the transaction documents (the SPA) and completing the transfer of the shares to the buyer;
• Ensuring any post completion formalities are dealt with.

Pre contract:

Prior to the transaction commencing, the parties have normally reached an agreement in principle on the key aspects of the deal. Normally this is contained in a document called ‘Heads of Terms’. It is important to note that the Heads of Terms may not be legally binding in their entirety, as the position may change on the outcome of the due diligence process.

At this point, depending on the size of the transaction, the Companies concerned or even the sector the Companies are found in, a Confidentiality Agreement may be required to ensure that the information provided to the Buyer (which often will be highly confidential) is protected.

Lastly, sometimes a buyer will require a seller to enter an ‘Exclusivity Agreement’ with them, to ensure the seller is not negotiating with other buyers at the same time. This gives the buyer a period of exclusivity in order to progress and conclude the transaction.

Due Diligence:

Due Diligence exercise aims to assess the target companies legal, financial, tax and operational status.

It consists of the Seller being provided with a ‘Due Diligence Questionnaire’ which sets out a plethora of questions about the background of the target Company, its operations and all areas of it as an entity. The Seller then answers the questions and submits evidence to strengthen and prove each answer. This can require an extensive search of documents internally within the Company as well as a logistical nightmare of processing and ensuring these are managed in an organised fashion for the Buyer to inspect. It is however, a crucial element as it directly links with the disclosure process that will be required on the part of the seller later on in the transactional process.

Share Purchase Agreement (SPA) and other Transactional Documents:

The SPA is an extensive, often very uniquely detailed to the transaction, document which sets out the following:

1. The terms of the transaction,
2. Any conditions the transaction is subject to,
3. To document any representations and/or warranties made by the seller, and
4. To protect the buyer post completion (by imposing restrictions on the seller for example).

Drafting the SPA is a complex task that requires a full understanding of the transaction. It also requires a pragmatic approaches to be taken by the Buyer’s and Seller’s solicitors in order to get it agreed. It is the key sale and purchase contract and therefore, is the main transactional document, meaning it is incredibly important and often takes time to negotiate, draft and finalise.

Alongside that, a Disclosure letter will be required by the buyer which sets out any general as well as specific disclosures against the warranties made by the seller in the SPA. Warranties are legally-binding assurances the seller provides to the buyer within the SPA, to give the buyer assurances about the state of the company it is acquiring. Making disclosures against the warranties within the SPA  protects the seller against any breach of contract claims as the parties usually agree that if a breach of the warranties in the SPA arose through something disclosed in the Disclosure letter, the Buyer can bring no claim.

A Tax Covenant is also required if the buyer is purchasing capital of the target Company. This is to apportion the liability of the pre-completion tax liabilities. A simple way of considering what this is, is that it is like an indemnity (a legally-binding promise from one party to another to cover them on a pound for pound basis) given by the seller for any unpaid pre-completion tax, unless any agreed exceptions applied)

Lastly, in order to pass legal title of the shares, Stock Transfer forms must be drafted, completed and executed before being approved by the target company post completion.  Further ancillary documentation will likely be required, including board minutes of the target, seller and buyer (as applicable), director resignation and appointment documents, persons with significant control documents, powers of attorney over shares, company books and registers or deeds of indemnity for any lost share certificates, as well as other related ancillary documents.

Completing the Transaction:

Following completion of the transaction (which usually happens on simultaneous basis with exchange) various steps need to be completed, such as:

• Filing documents at Companies House (like notifications of new directors),
• Updating the Company’s Registers and Company Books,
• Conducting all filings with Companies House
• Paying any Stamp Duty applicable on the share transfer to HMRC,
• Providing a bible of the transaction documents for each party and their respective solicitors.

Starting a share purchase can seem complex, but our Corporate team at Fisher Jones Greenwood Solicitors is here to help. Get in touch for expert guidance by calling 01206 5435700 or email info@fjg.co.uk.