Table of Contents
If you are preparing to purchase another business through a share purchase, you will need to provide numerous specific documents to make the purchase. The process of buying a business through a share purchase is divided into six steps:
- pre-contract;
- due diligence;
- documentation;
- transaction consents and approvals;
- completion; and
- post-completion.
Each step has a host of documents you should familiarise yourself with before advancing to the next. This article will provide an overview of the various documents that are typical of a share purchase in England.
Pre-Contract
The seller and buyer have one overriding objective in the pre-contract stage: to agree on the deal and agree on the essential terms. This includes negotiating items like:
- the purchase price;
- the structure of the deal;
- the general timeline of the deal; and
- commercial considerations specific to the target business.
Valuation
One of the essential tasks that you, as the buyer, will undertake at this stage is the valuation of the target business. The outcome of the valuation will determine your final negotiating position on the important terms. Therefore, you will likely need to instruct a corporate accounting team to produce a valuation report.
The nature of the valuation depends on the business, but your financial advisors are likely to use a few different valuation methods. Some approaches include:
- market multiple;
- discounted cash-flows;
- net asset valuation; and
- dividend yields.
These valuations will then guide the outcome of the initial negotiations.
Heads of Terms
Once you and the seller agree in principle to the critical terms of the deal, your legal team will document this in what is commonly called ‘heads of terms’. These terms are not typically binding, but there may be additional terms related to matters like cost and exclusivity that will have legal effects.
Confidentiality Agreement
Since you will have access to sensitive information on the target business, the seller will likely ask you to sign a confidentiality agreement. While there may be a confidentiality clause in the heads of terms, it is common to have this as a separate document.
Notably, these agreements will be legally enforceable.
Exclusivity Agreement
Entering into a formal share purchase agreement is costly and time-intensive, so you might have your seller sign an exclusivity agreement. This will prevent them from negotiating with other prospective buyers while the formal negotiation and due diligence process is ongoing. If they break the agreement, you can claim against them for costs.
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Due Diligence
Due diligence is the process where you, as the buyer, investigate the target business as thoroughly as possible to uncover anything that might affect the business value or require you to renegotiate critical terms of the deal. It will also enable you and your advisors to agree on the finer points of the transaction.
Due diligence is a highly vital part of the transaction process. It is also intensively time-consuming and often costly. Many different documents will exchange hands, but in general, we can distinguish between:
- financial due diligence; and
- legal due diligence.
Your financial advisors, including your accountants and bankers, will lead the financial aspect, and your legal representatives will conduct the legal due diligence. However, throughout the process, all team members should work together.
In the end, your advisors will prepare financial and legal reports — each of which tends to be thorough and lengthy. These will outline all the risks uncovered and give you the information you need to determine your position before the final negotiation stage.
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Transaction Consents and Approval
Some deals, particularly those involving large businesses, require you, as the buyer and the seller, to obtain consent from certain third parties. These third parties include:
- the board of directors for both the buyer and seller;
- shareholder approval for both the buyer and seller;
- regulatory approval, especially competition market authorities; and
- HMRC clearance for specific tax relief measures.
The third parties should comply with all legal formalities, such as passing the appropriate shareholder resolutions. Your legal team should also ensure that any consent is evidenced by board minutes where applicable.
Completion
Share Purchase Agreement
Both parties must sign a share purchase agreement (SPA) to complete the purchase. This legally binding document commits both parties to finalising the purchase agreement. This document will include the following:
- the commercial terms of the agreement;
- which conditions need to be met for the agreement to complete;
- representations and warranties (legally binding promises or statements of fact the seller has made to you); and
- post-completion restrictions (if any) you impose on the seller, such as non-solicitation measures.
Disclosure Letter
A disclosure letter accompanies the SPA and specifies the scale and scope of the representations and warranties. Disclosure letters serve to:
- bolster the legal effect of any warranties and representations the seller makes in the SPA; and
- encourage the seller to disclose all relevant information in advance of the parties signing the SPA.
Tax Covenant
When you purchase the shares of a company, you acquire the entire business, which may include positive and negative elements. You may wish to have the seller agree to a tax covenant to protect yourself. This is a deed that ensures all the business’ pre-acquisition tax liabilities are matched to the appropriate parties.
Stock Transfer Forms
Despite the hundreds of documents that you will likely review throughout the process, the stock transfer form — or share transfer form — is the only one that is legally necessary. The seller must complete a stock transfer form and transfer it to the buyer to legally transfer the title of the stocks from the seller to the buyer. Following this, the target company’s directors will enter the new shareholders into the company’s registrar of members.
Post-Completion
There may be certain post-completion formalities you or the seller need to action. These can include:
- public announcements;
- paying any applicable stamp duty on the acquired shares;
- Companies House filings and associated administration; and
- compiling copies of all the relevant documents for both you and the seller.
Key Takeaways
If you are buying a business through a share purchase, be prepared to review many documents as the transaction progresses through several stages. You will begin with pre-contract negotiations and end with post-completion documentation. To help, you can instruct a competent deal team of legal and financial advisors who will guide you through the process and handle much of the documentation.
If you need help with completing a share purchase, our experienced commercial lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
From a strictly legal perspective, you technically need the seller to complete a stock transfer form, and the business is yours. However, in practice, because buying a business is such a complex and onerous process, hundreds more documents are commercially necessary, such as stock transfer forms and disclosure letters.
There are six main stages of a share purchase: pre-contract; due diligence; documentation; transaction, consents and approvals; completion; and post-completion.
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