The sale of shares in a company is a common means by which ownership can be changed. Key features of a share sale agreement are:
- Agreement to sell and purchase;
- Consideration (and any adjustments);
- Warranties and indemnities;
- Restrictive covenants;
What are the advantages of selling shares?
- In circumstances where the entire issued share capital of the company is being sold, the seller will benefit from a clean break. For the buyer, this means that the company is being acquired with everything in it, including its assets, liabilities and trading history;
- In most cases, the seller pays capital gains tax on the disposal of shares and may well be able to claim entrepreneurs’ relief (provided that certain qualifying conditions are satisfied).
There are also advantages for the buyer:
- Buying the shares in the target company preserves the continuity of the business (there is no need to legally transfer the assets, property or employees of the business to the buyer);
- The target company continues as before which simplifies the tax position for the buyer as well as the seller;
- The buyer can take advantage of any loss reliefs contained within the target company.
What are the disadvantages of selling shares?
- The buyer will need to conduct more detailed due diligence;
- The warranties/indemnities required by the buyer in the sale agreement will be more extensive;
- The overall costs of the transaction for the buyer and seller are likely to be greater.
Heads of Agreement
Once agreement in principle has been reached between a seller and buyer (particularly in relation to the valuation of the company and price to be paid), it is advisable for the parties to enter into heads of agreement.
The heads of agreement will contain the essential terms of the transaction, they will form the basis upon which the legal documents can be drafted and will help to ensure that time is used efficiently moving forward. The heads of agreement are generally not legally binding, with the exception of exclusivity (for the buyer) and confidentiality (for the seller).
The Share Sale and Purchase Agreement
The sale and purchase agreement will vary considerably from one transaction to the next, but some of the most significant points are as follows:
- The price payable for the shares can take a variety of forms, for example, cash, shares or debt (i.e. by way of loan notes);
- It is not uncommon for the agreement to contain an earn-out arrangement under which all or part of the purchase price is calculated by reference to the future performance of the business; a seller in such circumstances would need to consider suitable protections to ensure that the operation of the business of the company is maintained;
- The price may be subject to an adjustment based on net assets or current assets of the company or a working capital requirement (by reference to “completion accounts”);
- The seller will give a series of warranties (or contractual promises) to the buyer in relation to various aspects of the affairs of the company. Warranties serve the dual purpose of providing the buyer with a remedy for breach of contract if a warranty is breached (therefore allowing a price adjustment post-completion) and also by promoting the flow of information regarding the company’s affairs from the seller to the buyer in the form of a disclosure letter from the seller. A disclosure letter will set out those facts and circumstances which are inconsistent with the statements made in the warranties;
- If the buyer has any specific issues of concern then these may be addressed in the form of indemnities;
- The seller is expected to give an indemnity (or tax covenant) in relation to the company’s tax affairs so that the seller remains responsible for certain specified and any unexpected tax liabilities;
- Restrictive covenants are typically included to protect the buyer from the seller setting up a competing business and poaching customers/suppliers and employees of the company;
- If a deal is funded by a third party, or through a loan, then the funder may wish to take security over the company and/or its business. A seller may also wish to take security if the purchase price is to be paid in instalments over a period of time post-completion.
Our Experience & Case Examples
The sale of the Risktec Solutions Group to German group TUV Rheinland
Risktec provides specialist risk management consulting and training to national and international organisations and public bodies. It included group companies in the United States, Glasgow and the Middle East and was owned by its employees.TUV Rheinland is one of, if not, the largest German industrial provident society in Germany.
Myerson solicitors were involved in a transaction managing a sale process with over 100 shareholders. We also provided a data room for this deal and worked closely with our Employment and Property Teams.
The sale of First Choice Facilities plc to the UK subsidiary of American owned Tyco, ADT Fire and Security plc
First Choice operated a national network of safety, security and access control systems with a broad range of clients including local authorities and blue-chip companies. With First Choice being a plc, we liaised with the Takeover Panel and dealt with its re-registration as a private limited company. We also provided and managed the data room for this deal and worked closely with our Employment and Property Teams.
The sale of John Shepherd Lettings to Lomond Capital
After successfully acting on the sale of Thornley Groves Estate Agents to Lomond Capital in 2013, we acted for Birmingham-based John Shepherd Lettings who were also acquired by Lomond Capital in 2014.
Shepherds had 4 branches across Birmingham with a substantial letting and management portfolio. We also provided a data room for this deal and worked closely with our Employment and Property Teams.
More case examples include:
- The sale of Thornley Groves to Lomond Capital. Thornley Groves had 8 branches across Central and South Manchester and, at the time, sold £250,000,000 of property a year, handled over 3,000 lets and managed more than 1,600 properties.
- Acting for shareholders in IT/Technology companies in relation to the sale of their entire issued share capital to overseas buyers.
- Advising Stax Trade Centres plc on the purchase of Edinburgh based Wishart & Co Ltd.
- We liaised with a fellow MSI member firm in Scotland (in relation to Scottish property matters) and working closely with corporate finance advisers for both the sellers and Stax.
- The sale of the majority stake in SMI Limited (a company specialising in medical imaging and scanning for a number of PCTs and in the private sector) to Care UK. This was a challenging transaction at the time of big changes in local authorities’ requirements and government cuts.
- The sale of Storm Recycling Limited to Viridor Waste Management, a large waste management company (part of the utility group, Penon) on the acquisition trail.
- The sale of a company involved in the provision of multimedia services to the nautical industry.
- This matter involved liaising with a shareholder based in the US and Asia and the target itself had a number of subsidiaries in various continents.
- The sale of a niche digital agency (specialising in the health sector) in relation to its sale to Saatchi & Saatchi Healthcare.
- The sale of a company involved in the supply and recycling of chemical solutions to a company on the acquisition trail.
- The sale of a majority shareholding in JTK Automotive Limited, a provider of online remarketing solutions to the motor industry, to British Car Auctions Limited.
- Advising various companies in the healthcare industry on their acquisitions in addition to advice on general commercial matters.
- Acting for Peter Wheeler and his family in the sale of Lancashire-based iconic TVR Engineering Limited to Russian businessman Nikolai Smolenski, dubbed the “Baby Oligarch”.
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