Completion
Completion of the Sale
Completion of the share purchase agreement in its simplest form involves the transfer of the shares in exchange for payment of the price. This usually involves the sale of the entire share capital held by one or more sellers in return for the payment of a once off price. There may, of course, be many variants on this position.
There will generally be a completion meeting, often held in the offices of the solicitors of one of the parties or the buyer’s funders. Completion will not take effect until the various conditions precedent have been satisfied. See the chapter in relation to pre-conditions and conditions subsequent which may be applicable to completion of the sale.
The share purchase agreement will generally prescribe in detail the documents which are to be exchanged and the format in which they are to be given. Otherwise, there might be room for significant dispute. The documents may be specified and listed in an appendix or schedule to the share purchase agreement. They may have been the subject of ongoing negotiation as to their final content throughout the relevant period.
The Purchase Consideration
The share purchase agreement should set out the nature of the consideration and how and when it is payable. The purchase price in a share purchase agreement is most commonly paid in cash. In principle, any good consideration or combination of types of consideration is possible.
Various issues can arise in relation to the nature of the consideration itself. It may be in cash, shares or a loan. It may be payable immediately, or it may be deferred. It may be due or be contingent on compliance with conditions. There may be timing issues. There is commonly deferred consideration, which is contingent on compliance with conditions. These factors may lead to an adjustment in the consideration after completion.
Payment in Shares I
The buyer may pay part of the consideration by way of shares in the buyer company itself or the holding company of the buyer’s group. In this case, the selling shareholders would become part shareholders in the buyer’s group. The arrangements may vary from a consideration substantially in cash, with a small shareholding in the buyer’s group to an arrangement close to a merger where both seller and buyer and as owners of the new entity control both the seller company entity and the buyer company.
Where the buyer is a public company, the consideration is often paid by way of shares in the buyer company. The seller who acquires shares in the buyer may intend to hold them or sell them to other investors in due course. If the buyer is a publicly quoted company, there should be a liquid market in the shares. Where this is not the case, they will be less liquid or close to illiquid. There may be difficulties of valuation and the inherent difficulties that apply to a minority shareholding.
A seller will generally prefer cash to a share for share sale, given the above disadvantages. Even in the case of a public company, share values may change rapidly in line with market factors. It may be provided as a (pre)condition that the seller may rescind the agreement if the buyer’s share price falls below a certain level in the case where all or part of the consideration comprises shares in the buyer public company.
Payment in Shares II
Public companies are subject to statutory restrictions in respect of the issue of their shares other than for cash. Generally, the consideration must be independently valued within a period prior to allotment. Certain other filing obligations arise. It is an offence to fail to follow the procedure prescribed by the Companies Act.
Subject to conditions, mergers and takeovers are exempt from this requirement provided that the allotment of shares in the company is on terms that the whole or part of the consideration for the shares is to be provided by the transfer to the company of all, or some of the shares of a particular class of shares in the offeror company. This exemption is available, where the offer is made to all the shareholders of the target company.
Where the acquisition is by way of a share for share exchange, advantageous stamp duty and capital gains tax treatment may be available. Subject to conditions, the new shareholding is treated as if it was the old shareholding and there is deemed to be no taxable conveyance or disposal.
The seller may retain shares in the sold company. In this event, the seller may require a shareholders’ agreement to protect itself as a minority shareholder. It may require board representation. See generally the sections in relation to the matters typically found in shareholders’ agreements.
Share for Debt Securities
The consideration may comprise debt or loan notes. It may comprise debt securities or debentures in the seller or buyer. The seller is thereby owed monies in accordance with the terms of the debt instrument. Exceptionally, the debt may be charged on the seller’s assets by way of a debenture. It must be in the CRO as a charge over assets of the seller.
Formerly, there was a capital gains tax exemption where the consideration for the sale of share was received by way of loan securities in the buyer. The loan security / debenture was treated as being in the nature of a security and the exchange of shares for structured debt received a capital gains tax exemption / deferral.
When the capital against tax rates were lowered at the turn of the century, this exemption together with several others was removed. They were not reinstated when capital gains tax rates were later increased after the financial crisis.
Completion Accounts
The precise purchase consideration is commonly fixed with reference to the financial position of the company as on a particular date, represented by financial accounts or the management accounts. This is because the value of the company’s current assets will vary on an ongoing basis in accordance with the course of its trading. There will be a time lapse between the last date to which accounts are made up and available and the completion date.
The completion accounts are later prepared, made up to the completion date. It may not be possible to ascertain all the elements in the accounts until sometime after that date. The ultimate price is definitively set by reference to the latest financial accounts as adjusted by the nets assets value in the completion accounts.
The consideration may be deemed to be varied in accordance with the completion accounts. The consideration on completion is effectively provisional until the retrospective determination of the position as on the completion date. The adjustment in price may require that one party pay monies to the other. There may be a repayment by the seller to the buyer. The buyer may be required to pay an additional sum.
Preparing the Completion Accounts
The completion accounts should be prepared on the basis of the same accounting treatment. The share purchase agreement may provide for the principles applicable to the completion accounts. There may be considerable latitude as to proper accounting treatment of particular transactions risks and contingent liabilities.
Valuation issues may arise. Particular provisions may be provided to define the treatment of certain items so that the position is certain.
The auditor or another person who is charged with preparing the accounts should have full access to records of the business. Provision may be made for the timing of the preparation and completion of the completion accounts. There will generally be a procedure which provides for the completion accounts being accepted and becoming definitive for the purpose of the agreement.
There may be a dispute resolution procedure whereby either party can dispute the treatment of matters in the completion accounts. There may be a reference to an independent expert appointed by an officer such as the President of Chartered Accountants Ireland or the Law Society. It may be provided that the independent accountant or such equivalent party makes a determination in relation to the matters dispute. Provision may be made for the costs of the disputes. The party who is found to be incorrect may be required to meet the whole costs.
Contingent Consideration
The value of a company is often highly uncertain. It may be subject to different opinions. Sometimes part of the consideration is contingent, and the agreement provides for the payment of part of the price, dependent on the ultimate outcome of the future trading performance. This is often referred to as an earnout.
Earnouts are particularly appropriate where the sellers continue to be employed or involved in the target company. It provides an incentive for them to work towards increasing the company’s value and accordingly increasing the consideration to be paid to them.
The terms for payment of the additional consideration may be such as is agreed and appropriate to the circumstances. There may be a fixed period after which the additional consideration is paid or not paid or is paid in part by reference to financial targets determined by financial statements in respect of post-completion trading periods.
The additional consideration may be subject to an upper ceiling. There may be other ongoing conditions, such as that the seller continues to be employed and meet other criteria.
Calculation of Consideration
Where there is a contingent consideration, provisions equivalent to those for completion accounts should be provided for. The sellers may require a range of protections. The seller may require measures which reduce the risk of the buyer unfairly manipulating the various factor so that the earnout is not paid.
The sellers may require ongoing input in relation to the management of the company so that they can have some control over the factors that achieve the earnout. This may be appropriate where the sellers continue to be involved in the company, and the earnout is a substantial part of the consideration. In other cases, the unpaid element may be relatively insignificant, and it may not be legitimate or reasonable for them to retain significant control.
Where the sellers remain on as a minority shareholder, minority protection provision may be provided in the sale agreement. Where the sellers remain on as employees, the terms of their employment contracts may be specifically provided for by the terms of the agreement. It may be provided that on completion the target company and seller enter the contract on the stated terms. The target company may be precluded from terminating the agreement other than for a good cause.
Security for Future Consideration
One or other party may have to pay or repay sums after the completion accounts have determined the net asset position. There may be a deferred consideration. The consideration may be deferred irrespective of whether it is contingent. It may be simply payable at a later date. It may be payable by instalments.
Issues of security for the future payments arise in the above contexts. The parties who is due to receive monies commonly requires security in relation to the payment of the sums. Where further monies are likely to be payable by the buyer, an estimated sum may be held by way of security in an escrow account. This is subject to unconditional release by the escrow agent to the party entitled on the satisfaction of the requisite conditions.
The sum may be held jointly by the parties’ lawyers, or by an independent third party. Provision should be made for the terms of the release and for any interest that accrues.
Where the seller may be required to repay consideration, an estimated sum may be held in escrow in the same manner so as to give the buyer corresponding security for the price adjustment.
CGT Clearance
Where the bulk or the majority of the assets of a company are attributable to Irish land, real property mines or minerals, then the sale is subject to capital gains tax irrespective of the residence of the seller. There is a statutory requirement for a capital gains tax clearance certificate from the Revenue Commissioner before the completion of the sale in this case.
If a clearance certificate is not procured, the buyer must pay 15 percent of the consideration to the Revenue Commissioner on completion. He is deemed to be discharged in respect of his obligation to the seller. The seller may be able to reclaim part or all of the sum paid to Revenue in due course from Revenue. The seller is more likely to provide that the issue of the relevant clearance certificate is a pre-condition to completion.
If the seller is non-resident and the company is subject to this requirement then provision may be required by Revenue for securing payment of any capital gains tax due as a condition of the issue of the certificate.
Shares and Share Certificates
At the core of the sale, is the transfer of the shares by the buyer to the seller. Almost all shares in Irish companies are in registered form, evidenced by share certificates. Registered shares require registration, and the share is not transferred until the share certificate transfer instrument is duly stamped, delivered to the company secretary, registered and written into the register of members.
Shares in some type of companies may be in bearer form. A private company is prohibited from issuing shares in bearer form. This restriction has been extended to most public companies by the Companies Act 2014.
The share certificate is prima facie evidence of title to the shares. It sets out the nature of the shares, the number of shares, and the name of the legal owner.
The share certificate is not a document of title as such. It is possible in principle for a duplicate to be issued. The company may incur liability in some cases where a third party relies on a share certificate.
Where a share certificate is lost, it is generally acceptable to furnish an indemnity in respect to any loss arising from the existence or misuse of the original.
Transfer and Registration
Shares are not kept in a public register. The register is kept by the company secretary. Particulars of registered shares or changes in the shareholding are included in annual returns which are registered in the Companies Registrations Office and which can be checked online
The form of share transfer is prescribed by legislation. Stamp duty legislation requires a stamping certificate to be produced. There is a one percent stamp duty on the transfer of shares in a private company.
There may be legal and beneficial owners of the share. In accordance with general principles of equity, the party who is the registered owner may be a nominee and hold in trust for another party who is the beneficial owner. They may be a representative such as personal representative, trustee or other office holder. The general provisions of law and equity apply.
Upon registration of the transfer, the seller’s share certificate is surrendered to the company secretary, the register of members is written up and a new share certificate is issued to the buyer. This is once again prima facie evidence of title to the share only. The change in ownership is not registered in a public place as such other than in the context of the company’s next annual return which will show the changes in the ownership and transfer of shares.
Transfer on Completion
The transferee does not acquire title to the shares until he becomes registered as owner. Under the standard company constitution, the directors may reject the registration of a transfer. The share purchase agreement will specifically provide by way of minuted meetings for the resignation of outgoing directors and the appointment of new directors at the completion. It will provide likewise for the approval by the directors of the share transfer form and their (later) entry on the register of members, after stamping.
The secretary may enter the buyer and its nominee / vehicle in the register of members subject to production of the appropriate stock transfer form and evidence of payment of stamp duty. In strict terms, the registration of the buyer or the buyer’s nominee entity as a shareholder cannot take place until the relevant instrument of transfer has been stamped.
The buyer’s nominees may become directors immediately. The obligation to file a CRO return and consent within 14 days is administrative and is not a precondition to their assuming office.
The buyer is not entitled to exercise its legal rights as shareholders until it is entered in the register of members. This may take some weeks after completion. However, the buyer will become the beneficial owner of the shares as from the date of payment. Accordingly, the outgoing shareholders must act as its nominee.
The share purchase agreement will generally provide that after completion and pending registration of the buyer or its nominee entity, the seller/ transferor will exercise its rights as shareholders / members on behalf of the buyer /transferee entity.