We have assumed, for the purposes of this guide, that your transaction will be structured as a share sale rather than a sale of the business / assets. In a share sale, the principal transaction documents would be as follows:
- Share Purchase Agreement
- Disclosure Letter
- Tax Covenant
Other ancillary documents:
- Confidentiality agreement
- Board minutes / approvals
- Resignation letters / compromise agreements
- Stock transfer forms
An asset sale is generally speaking not as document-heavy and we would be happy to discuss the relevant transaction documentation with you if helpful.
Share purchase agreement
The share purchase agreement (or “SPA”) will be the key document dealing with the sale of your business. It will cover a number of related areas but, in short, it simply represents an agreement to sell your shares in the company (the “target”) at an agreed price.
A large part of the SPA will provide the buyer with contractual comfort as regards the target. For instance, the buyer will expect to benefit from a number of warranties in respect of the target company and its business. These are designed to ensure the target business is in “good shape” and to flush out any material issues. If a warranty turns out to be untrue (e.g. the target is subject to litigation when the seller has warranted that there is no litigation outstanding), the buyer will have a claim for breach of contract.
The purpose of the disclosure letter is twofold:
1) the disclosure letter provides an opportunity to the buyer to capture information about the business which may not have been covered by the due diligence exercise; and
2) the disclosure letter also works in association with the warranties, in that it represents the seller’s opportunity to respond to and, in effect, “switch off” any potential liability under the warranties. The seller does this by highlighting to the buyer if, and how, a warranty is untrue or inaccurate and supplying supporting evidence / documentation. For this reason, the disclosure letter is a crucial document for the seller – the buyer will not be able to bring a claim under the warranties if the relevant facts have been properly disclosed.
On a share sale, the buyer will be acquiring the target company “lock, stock and barrel”. In doing so, the buyer will acquire not only the target business but also the target company and its entire trading / tax history. The tax covenant seeks to draw a line in the sand (typically at completion), such that the seller is responsible for all pre-completion tax and the buyer is responsible only for post-completion tax.
As part of the sale process, you will be expected to share information about your business with potential buyers. To help maintain confidentiality, you will want to ensure an appropriate confidentiality agreement is in place before any information is disclosed.
Board minutes / approvals
Before you complete a sale, it will be important to ensure the transaction has been properly approved – not only by your board but also by the buyer’s board.
Resignation letter / compromise agreement
If you are exiting the business, you will be required to resign from any employment and/or office you currently hold. As part of that process, you will be asked to waive any claims you may have against the target company, its employees and officers which is generally done by way of a compromise agreement.
It will be important to identify certain individuals within your business with responsibility for taking the transaction forward. Driving a transaction to completion can be a heavy burden and, to make sure we do so successfully without compromising your existing business, it will be important to ensure your internal team is appropriately resourced.