If you are contemplating the sale or purchase of shares in a private limited company, our experienced corporate lawyers are here to help. Whilst this is no substitute for tailored legal advice, hopefully it should provide a brief overview of some of the key clauses in a standard share purchase agreement (or “SPA”).
What is an SPA?
The SPA is a vital document that sets out the terms of the agreement between the buyer and the seller for the acquisition of shares in the private limited company, commonly known as the “target company”. The SPA encompasses vital particulars, such as the purchase price, the shares being purchased, warranties, and the conditions for completing the transaction.
Navigating the Completion Process
Completion marks the culmination of the transaction, heralding the buyer’s official ownership of the shares. Completion can either take place following an “exchange” period, or often simultaneously. A properly negotiated SPA will often include a list of requisite actions and documentation to be provided by the seller ensuring a seamless and successful completion for the buyer. It also makes sure the seller is paid at a certain point i.e. on completion, or by way of deferred consideration (instalments) and so on.
What is a Conditional Completion?
In certain instances, completion may hinge upon specific conditions, such as securing shareholder or regulatory approvals, or landlord consents to changes in control if the company is a tenant. Termed as “conditional completion,” these situations warrant adherence to predetermined timeframes.
Should a time gap exist between signing the SPA and finalising the transaction, the seller shall continue to run the business until completion. To safeguard the buyer’s interests during this interim period, the seller may enter into certain commitments outlined within the SPA.
What is Consideration?
Consideration is the payment rendered by the buyer to the seller for the acquisition of the shares. Should the parties opt for full and immediate cash payment upon completion, the process remains straightforward. If alternative payment arrangements, such as deferred payments or non-cash considerations (e.g., loan notes or equity finance), come into play, rest assured, these should be incorporated into the SPA for certainty on both sides.
What are Warranties and Limitations?
Unlike with an asset purchase, on an acquisition of shares, the buyer assumes all associated liabilities of the company. To safeguard the buyer’s interests, it is prudent to seek “warranties” from the seller. These contractual statements help to provide certainty on the state of affairs of the company at the time of completion. The fine nuances of these warranties and the seller’s commitment to transfer shares devoid of any encumbrances are often the subject of long negotiations. Sellers’ representatives will usually try to sensible limit the warranties, and add in hurdles, such as minimum values of loss and time limits, to help ensure the seller doesn’t have to worry over trivial issues, or face multiple claims post completion.
Progressive lawyers (like those in our company and commercial department) acting on a fixed or similar fee will generally try and propose a sensible commercially minded set of warranties and limitations from the outset. It is generally easy to spot lawyers acting on traditional hourly rates, by the way they doggedly try to argue over relatively trivial, or irrelevant, provisions. Whilst some deals are necessarily more complicated than others, there is rarely any need to have 25+ pages of warranties and 5 pages of limitations on a relatively straightforward share sale, up to say £3m in value if the buyer has carried out proper due diligence on the company being purchased.
Ensuring the Parties’ Obligations Are Firmly Secured
Should you harbour concerns pertaining to the other party’s financial standing, we we can request a guarantee of their obligations. This helps ensure that, in the event of a warranty or indemnity claim against the seller, or a deferred payment not having been paid by the buyer, there exists a robust financial backup to fulfil the obligations. These may be particularly relevant where there are holding companies involved on either side for example.
Safeguarding Business Interests through Restrictive Covenants
To protect the target company’s business interests, the seller may be restrained from soliciting employees, clients, or customers for a specified duration post-completion. Additionally, the seller might be forbidden from engaging in competing business endeavours during a predetermined timeframe.
Acquiring shares in a private limited company encompasses a multitude of legal considerations. Our expert company and commercial team is here to deftly guide you through this process, empowering you to navigate it confidently whilst always keeping your eye on your business goals. When issues arise or assistance is required throughout the process, or post completion, our lawyers can help guide you through.
Scott Bailey LLP is a law firm in the New Forest, Hampshire, and our solicitors and lawyers provide businesses and business owners expert legal advice on a range of business areas. Do not hesitate to contact us for advice on your share purchase or share sale.
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Ben Ironmonger is a solicitor and partner at Scott Bailey LLP. Ben heads up the corporate and commercial team, and has years of experience acting for businesses across a range of sectors on a range of legal matters.