Key steps in a legal corporate share deal

Generally, transactions will have a buyer, target company and seller.

The buyer will broadly be looking to spend as little as possible to acquire a well-managed and functional company with protection from any issues with the company that the seller may fail to mention, while the seller will be looking to sell for as high a price as possible and with as much protection as possible from any future claims the buyer may bring as to the condition of the company on sale.

A valuation of the target company will help both sides gauge their position.

On any purchase/sale of a company, it is important that a buyer gathers as much information as possible about the target company (Target) from a seller. The due diligence (DD) process often includes the following:

1. Investigating the Target by making a number of legal DD enquiries. Such legal enquiries will usually be asked of a seller in parallel with financial, tax and commercial/other DD enquiries. Legal DD enquiries are generally raised by the buyer’s solicitor and to obtain more detailed information about the Target. Legal DD enquiries raised of the Target will usually relate to (but not limited to):

1. Corporate structure of the Target and any subsidiaries which may form part of the Target’s group (Group).
2. Any material commercial contracts and/or agreements.
3. Any property which forms part of the transaction.
4. Details of any security registered against the Target or the Group.
5. Intellectual Property of the Target or the Group.
6. Any employment details/contracts of the Target or the Group.

2. A high-level review should be carried out by the buyer’s solicitor of the replies to DD enquiries and DD information shared by the Seller, focusing on key areas of concern to the buyer.

3. Once all of the seller’s replies to DD enquiries and DD information have been shared, the buyer’s solicitor will prepare a detailed DD report in order to identify and highlight any key areas of concern in the Target. A DD report also includes recommendations and action plans suggested by the buyer’s solicitor to reduce exposure or to rectify those risks identified in the report.

The SPA is the principal transaction document in a share sale and purchase. The main purposes of an SPA are as follows:

• The SPA outlines the primary terms of the transaction i.e. what is being sold, to whom and for how much, when and any agreed conditions for payment.
• Price and payment mechanism: the SPA sets out the mechanism for calculating the final amount of consideration payable, usually by way of completion accounts or locked box accounts.
• Earn out: SPAs may include an earn out provision, whereby part of the consideration payable is determined by the performance of the Target following completion.
• Risk allocation: the SPA will include warranties and specific indemnities (to cover specific conditions arising from the due diligence exercise outlined above) and will set out the sellers’ associated limitations for liability and the time limit for bringing a claim, financial parameters and any remedies for breach.
• SPAs also include a tax covenant, enabling the buyer to contractually recover any applicable tax incurred by the Target outside its ordinary course of business from the seller.
• Restrictive covenants: the seller agrees not to compete with the Target’s business or poach its customers or employees for 2/3 years after completion to protect the goodwill of the business (which they are being paid for).

A key transaction document is the disclosure letter, which is prepared by the seller(s) for the following reasons:

• The SPA will include warranties which are contractual “promises” given by the seller in relation to the Target. The sellers will “disclose” against these warranties in the disclosure letter.
• The disclosure letter offers protection to the sellers and acts to limit the sellers’ liability under the warranties. To the extent that the seller(s) properly disclose information to the buyer via the disclosure letter, setting out any exceptions to the warranties, the buyer will not be entitled to make a claim following completion for breach of warranty.
• The sellers should approach the disclosure exercise as if they were explaining each issue to someone who knows nothing about the target or its business. The seller should not rely on the fact that the buyer knew or ought to know about an issue in question.
• Disclosures should cross refer to relevant documentation within the Data Room as per the due diligence exercise outlined above.

Disclosures should contain sufficient detail to enable a reasonable purchaser to easily understand the consequences of what is being disclosed and whether it is paying what it should for the Target.

As part of a share sale or purchase, other ancillary documents are required to mechanise and give legal effect to the transaction (such as board minutes, written resolutions, stock transfer forms etc). The ancillary documents necessary to complete a transaction will vary from matter to matter and on the particular circumstances of the transaction.

The final transactional steps will be Exchange and Completion.

Exchange involves the signing of the SPA, which legally binds the parties to complete the transaction.

Completion involves the Seller’s delivery of the duly executed Stock Transfer Form(s) for the sale shares to the Buyer, and the Buyer in turn paying the purchase price.

Usually exchange and completion occur at the same time unless there are conditions which need to be satisfied before completion can occur, tying in with commercial practicalities of the Target business (e.g. the consent of a key customer to the change in control of the Target to ensure a material contract continues post-completion).

The details of what will occur when will be contained in the SPA, such as the documents to be delivered to each party and the buyer’s payment duties.

Even after completion, there is still work to be done by each party’s solicitors, including:

• Companies House filings and updates to the Target group companies’ statutory registers
• Making any Stamp Duty payments due to HMRC
• Dealing with other administrative matters such as the completion of a transaction “bible”
• Publicity and announcements

This is known as ‘post-completion’.