Selling a Business Through a Share Sale: What You Need to Know

What is a Share Sale or Purchase?

This is the process of an incoming buyer acquiring all or some of the shares in a company. It is more common for the entirety of a company’s shares to be sold, rather than just some, but this article is relevant to both. The buyer purchases the shares from the current shareholder or shareholders of the company and the operations of the company remains the same, it is the overall owner who changes.

There are several key stages in a share sale, and it is vital that you are correctly advised throughout, not only to protect your liability as a seller or to make sure a buyer knows exactly what they are buying, but also to ensure that the documents are negotiated in line with your instructions, and you are happy with the deal. Whilst all deals are different and have their own intricacies, the vast majority include the following steps:

• Pre-transactional documents – it may be necessary at the start of a deal to negotiate or draft documents that form the beginning of the transaction. These include documents such as heads of terms, exclusivity agreements or confidentiality agreements. It is important that the commercial terms of the deal are agreed from the outset and properly documented, furthermore, when you are selling or buying a business, confidential information is prevalent, and you may want an agreement which sets out the rules and liabilities of disclosing confidential information to a third party. A buyer may want exclusivity of a transaction, meaning that a seller cannot solicit an offer or negotiate a sale of the shares to another buyer within a set time period.
• Transactional consents and approvals – depending on the circumstances of the sale or purchase, it may be necessary to seek consent from bodies such as the Competition and Markets Authority, the government under the National Security and Investment Act or even sector specific like RICs. Furthermore, Tax Clearance may be required from HMRC to ensure that the transaction is treated a certain way. We will work closely with your tax advisors to ensure this runs smoothly.
• Due diligence – as a buyer you will need to carry out due diligence and investigations into the target company, and its subsidiaries, if there are any. You will want to know if there are any issues at all with the company, whether that be employment issues or outstanding litigation, which will affect the contents of the transaction documents. As a seller, you will need assistance in answering these queries and the buyer usually raises them in the form of a due diligence questionnaire. This is an important step when it comes to negotiating the warranties and disclosures throughout the deal.
• The Transaction Documents – as with the above, the due diligence has a major impact on the formation of the documents throughout. Each transaction is different in its own way, but broadly speaking all transactions will have a share purchase agreement, which is usually accompanied by a disclosure letter and a tax covenant, as well as further ancillary documents vital to the completion of the transaction e.g. board minutes and stock transfer forms.
• Signing and completing the documents – depending on how completion is structured, exchange and completion could be simultaneous or on different days. Separate exchange and completion is usually conditional upon something, such as approval from the Competition and Markets Authority.
• Post completion formalities – this includes filings at Companies House and paying stamp duty, among other things.

Who are the parties?

The seller is whoever owns the shares in their own right. If you own them in your personal name, then the seller is you personally. It may be the case that a company is selling its subsidiary, and if so, the parent company will be the seller.

People tend to buy businesses in many different ways. The Buyer could be a long-standing company who is acquiring another business, or it could be people in their own personal names. Additionally, the buyer could be a new company formed for the specific purpose of purchasing the shares of the seller.

Where does completion take place?

Completion of a share sale is no longer archaic. In a previous life it would have taken place at one of the parties’ offices following a meeting of all parties. In the modern world this isn’t the case, and the Share Purchase Agreement will state where completion takes place, but the parties do not usually meet at said place to complete.

When are the completion funds paid?

The payment of completion funds depends entirely on the structure of the completion funds itself. You may have agreed that the completion funds are to be paid entirely on completion but usually there are other factors that determine when and how much is paid out. Some of it can also depend on how the buyer has financed the transaction. You may have agreed that some of the completion funds are deferred, this could mean that the remaining funds are due by certain dates, or could be coupled with an earn-out (this could be linked with the performance of the target in the future). On the other hand, the buyer may have financed the transaction by way of loan notes, which are essentially legal I.O.U’s, with payments and interest being set on dates as agreed in the loan note instrument itself. Deferred consideration may have tax implications on a seller and because of this we would work closely with your tax advisors to assist you.

Why should I favour a Share Sale over an Asset Sale?

Selling the shares of a company rather than the assets is a cleaner break from the business. It keeps continuity of business and all of its operations for the buyer, as well as the employees, liabilities and contracts, and the buyer steps into the seller’s shoes without major disruption. The sale of shares also means that all assets and liabilities are transferred to the buyer. In an asset sale the buyer can pick and choose which assets and liabilities it wants, and can leave the liabilities all together. With regards to contracts, in an asset sale it may require third party approval to assign such contract, in a share sale the parties to the contract are not changing so this may not be required. You should also consider whether there is a change of control clause within the contract as that may trigger consent. You need not worry about TUPE in a share sale as the employees contracts are not being transferred as they will remain employed by the target company.

There are always tax implications for a share, or an asset sale and we would advise that the necessary advice is taken where appropriate.

How many other elements are involved?

Depending on how the business is currently structured, there may be several other elements involved. A key focus of the sale of the business may be its property, whether it currently owns property or whether the aim is to separate out the business’s property arm and trading arm, with a view to just selling the trading arm. It may be the case that you as a shareholder own the property that the company operates out of in your own individual names. Depending on the circumstances, it may be necessary to involve our Commercial Property Team to advise on the property aspects of the deal, whether that be dealing with the negotiation of commercial terms for new leases or advising on the distribution of property if there is a relevant demerger. Their input may also be required in relation to any property warranties or disclosures that are negotiated throughout.

Furthermore, businesses tend to have employees, and it may become apparent throughout the due diligence enquiries raised by the buyer that employment advice is needed to ensure that you, as the Seller, are protected. Our employment team is at hand to help with this.

Wilson Browne Solicitors have extensive experience relating to Share Sales and Purchases within a variety of different sectors and has a large team of professionals who can help guide you throughout the transaction to ensure a smooth sale, or purchase, and timely conclusion to your deal. Contact a member of team today on 0800 088 6004.