#14701 - Selling The Company - Business Law and Practice

Selling the Company

Share Sales

Share sales occur when a buyer purchases all of the shares of a company; the company will then be owned by the buyer. The transfer of the shares will be done using a Stock Transfer Form which is approved by the directors. The shares will be transferred when the register of member is updated. The consideration will be given straight to the selling shareholders.

Using a share sale is advantageous for the seller as the seller can walk away from the business as all of their actual potential liabilities will have been purchased by the buyer. There are also tax exemptions for the seller.

This is also a good sale for the buyer as the entire company is purchased which makes it simpler and causes less disturbance to the business on a day to day basis. There are also tax advantages for the buyer.

Asset Sales

Assets sales occur when certain assets of the business are purchased (such as IP, contracts, property, debtors etc.) and certain assets are left behind (such as creditors, liabilities etc.). The consideration is then paid to the company.

Using an asset sale is advantageous for the seller because they can sell underperforming or expensive assets or only sell part of the business such as new ventures.

This is also beneficial for the buyer as they can ‘cherry-pick’ which assets they want to buy; there are also tax advantages for the buyer.

Once the assets have been purchased by the buyer they will be transferred on completion. The company will then pay off any liabilities with the proceeds of sale leaving a ‘cash-shell’. The company can then be wound up and the shareholders will share any remaining cash in the company.

The employees of the seller will automatically transfer to the buyer by operation of law (TUPE). Contracts can either be novated (i.e. renewed with the consent of the third party) or assigned (i.e. only the benefit it transferred to the buyer, the burden remains with the seller).

Procedure

The buyer and seller’s solicitors take instructions from their respective clients. The parties agree the heads of terms and issues such as confidentiality and exclusivity.

The buyer send the seller the Due Diligence Questionnaire, and the seller replies.

The buyer drafts the Acquisition Agreement which is redrafted by the seller (who will insert the Seller Protection clauses).

The seller prepares the draft Disclosure Letter and sends it to the Buyer.

Both parties agree the Acquisition Agreement and Disclosure Letter.

The parties exchange contracts.

The parties obtain consents and fulfil pre-conditions.

Completion.

Heads of Terms

The Heads of Terms set out the parties basic understanding of the key commercial issues in relation to the transaction. This document helps to avoid misunderstanding and wasted costs/expenses in the future.

The Heads of Terms are not legally binding (except where the parties agree they are to be) but do carry moral force as the parties have agree terms upfront. Two main clauses will be considered:

Exclusivity clauses ensures the sellers cannot engage in negotiations with any other potential buyers which could drive up the price and turn the sale into an auction.

Confidentiality clauses will also be used to ensure sensitive commercial information is protected through the sale and will continue beyond the sale, even if the sale falls through and does not complete.

Due Diligence

The Buyer will always be subject to caveat emptor (buyer beware) and therefore the buyer will undertake due diligence to obtain detailed information about the company or business they are acquiring.

Due diligence will take the form of the Due Diligence Questionnaire which is sent by the buyer to the seller. The seller will respond and these answers can provide more information and further questions. Due diligence will also take the form of reports created by professionals, such as legal reports, financial reports and tax reports.

After all of the due diligence has been collected the buyer will decide whether to continue with the transaction. Certain issues such as reducing the purchase price or inserting contractual provisions can be identified and negotiated at this stage.

Disclosure Letter, Warranties & Indemnities

Warranties are representations of fact which are made by the seller to the buyer. Its primary purpose is to force the seller to tell the truth or illicit information about the company or...