Purchase Agreements
Sellers and Shares
Issues may arise regarding the authority of the selling entity. In the usual way, it is necessary to ensure that authority for the sale comes from the appropriate entities. Minutes and resolution should be entered by the selling company authorising particular directors to execute the relevant transfers, indemnities etc. so as to bind the corporate seller and any other guarantor company
Generally, the buyer will wish to acquire the entire share capital of the target company. It will wish to acquire all legal and beneficial interests in all share, loan capital and other rights and options which may in any way carry an interest, actual or prospective in the company.
In some cases, the acquisition may involve the partial redemption or buyback of shares in the company itself from investors. This may occur at the completion of refinancing or upon the buyback of investors following an investment in the company.
Assurance and Security
The buyer will wish to ensure that the seller entity is in a position to discharge the obligations undertaken in the share purchase agreement and tax indemnity. The buyer will need to consider whether the parent or another group company and /or the ultimate personal shareholders should be joined to guarantee the obligations of the seller company. Provision might be made for a retention or other security to meet claims up to a limit. This may be applicable for a period after completion.
The purchase monies may be distributed by the seller company to a holding group company or to shareholders. The seller may be then liquidated and wound up. It may distribute its assets so that it not in a position to meet obligations under the share purchase agreement as well as the warranties and covenants, in circumstances whereby liability later arises thereunder.
It may be possible to have the selling company undertake to retain its assets at a particular level to meet a liability. However, this may be difficult to enforce realise. Security of some type is preferable.
Types of Seller
The categories of shareholders who may hold the shares may be varied. They are not bound to sell the shares unless they are party to a share purchase agreement with relevant provisions which require them to do so.
Smaller shareholders who are in the nature of investors will not usually wish to give any warranties or indemnities in relation to the company in respect of matters with which they are not usually familiar.
In many cases, the seller will be another company, often a holding company. The business or company itself may be re-organised before the sale, for the purpose of segregating the assets of the particular business into that company.
Institutional Sellers
In some cases, the shareholders are wholly or partly an institution or intermediary which hold shares by way of an investment. The institutional investor will not the wish to give warranties or indemnities. They will not usually be intimately familiar with the running of the company. They will usually give warranties in relation to the title to their shareholding etc. only
It may be that the investors originally entered an investment agreement when they made their initial investment. The sale may constitute the realisation of that investment. It may be that the sellers are entitled to sell their shares or require the sale of all shares by way of realisation of their investment. I
t may be provided in the initial investment agreement that the non-institutional shareholders who typically manage and are the principal shareholders, will provide full warranties and indemnities to buyers, without the institutional investor being required to do so.
Trustee Sellers
Some shares may be held by the trustees of an employee share option scheme or other such trust. In most cases, the shares held by employees under a scheme are held in trust by a nominee pursuant to the terms of the scheme. The nominee will hold the title and may have the power to sell.
The nominee will not generally give the full range of warranties and indemnities. They would be required to give warranties in relation to their title to sell and their entitlement under the terms of the relevant scheme to sell the shares. The consent of the underlying beneficial owners may be required if there is no clear power of sale.
Exceptionally, a shareholder may be the personal representative of a deceased shareholder or trustees pursuant to a trust of which shares are the relevant assets. Under the standard company constitution, a person entitled to the deceased’s shares may become a member in place of the deceased member.
The personal representative or trustee will not wish to give substantial warranties or indemnities, given that they have no economic interest in the shares as such. The buyer may seek, and the seller may give warranties and indemnities in relation to their authority to sell. They may give warranties with recourse limited to the trust assets if they have the power to do so. In some cases, it may be possible for the trustees or personal representative not to dissipate the estate assets or distribute assets during part of all of the warranty period.
Insolvency Officer Sales
In some cases, the seller is an insolvency officer such as a receiver, liquidator or examiner. Typically, the receiver’s powers will derive from a charge over all of the company’s assets. In this instance, the receiver may sell the assets of the company as such. More commonly, the relevant business is transferred to a newly formed company (hived down) with appropriate tax reliefs for the reconstruction and rearrangement.
The receiver will not wish to undertake any personal liability. The receiver will wish to distribute the proceeds of the sale of the assets in accordance with his duties to the relevant creditors. Accordingly, the receiver, as an officer with no financial interest as such in the company, will not wish to give any warranties or indemnities beyond perhaps the title to the shares etc.
Where a receiver has formed a new company for the purpose of the sale, limited warranties maybe given with reference to that newly incorporated entity/subsidiary. Generally, the price paid in such circumstances will be discounted relative to what might pertain in an open market sale.
The receiver’s warranties are likely to be limited to the title to the shares. If the new company is “clean” and does not engage in any activity beyond that contemplated under the hive down agreement, the buyer will have greater assurance.
An examiner may formulate proposals for a scheme of arrangement in the context of an examinership. The proposals must generally be approved by a particular majority of the relevant creditors. It will usually require court confirmation. All shareholders may be bound to sell where a particular percentage vote in favour, subject to a right of objection to court. In some cases, the scheme may provide for redemption or repurchase of shares in the company. For much the same reasons as above, the examiner will usually give limited warranties only.
Multiple Parties
Where there are multiple sellers, the issue of joint and several liability on the warranties arises. This will determine to what extent a particular seller is responsible for the entirety of the claim subject to a right of contribution/payment from fellow shareholders.
The buyer will wish to be party to the shareholders’ agreement, primarily to take the benefit of the warranties given. He will also be party to the indemnity agreement for the same reason.
The buyer will commonly be a new company formed by a corporate group for the purpose of the purchase. This facilitates financing by way of guarantees by the acquiring company and other group members for the benefit of the target company secured by a charge over the target company shares and perhaps the assets of other companies.
Types of Buyers
Where a company is acquired by a member of a group, there may be tax considerations as to which company within the group should buy and as to how to structure and incorporate the new entity within the group. In this case, share purchase agreement may entitle the entity stated as a buyer, to nominate a particular entity as the buyer. It may be entitled to assign the rights under the agreement to that new entity or to an existing or future member of the group which will purchase the shares.
The company itself may be joined as a party to the tax deed of indemnity in order to benefit from it. It is more unusual for the company to be party to the share purchase agreement. To do so may raise issues as to unlawful financial assistance for the purchase of the company itself.
Buyer’s Obligations
The buyer’s basic obligations are to purchase the shares and pay the relevant consideration. There may be provision for contingent payments or payments by instalments.
In some instances, the buyer’s obligation to pay instalments of the price, may be conditional upon the later achievement of conditions. Part or all of the monies concerned may be held in escrow.
In some cases, the buyer may give warranties and indemnities, particularly where necessary in order to preserve a taxation position. Where there are obligations on the buyer post completion, the seller may require guarantees from parent companies or individuals, if there is a reasonable question over the ability of the buyer company to undertake the requisite obligations.
Management Buyers
Where the buyers are the existing management and controllers of the company, extensive warranties and indemnities may not be given. The management team will typically be in control of the company and have fuller knowledge than the sellers who are investors / shareholders and may be institutional shareholders. The purchase may be the redemption of the original investment by the institutional or other investors.
Generally, it is not reasonable for the management who are the controllers, to seek warranties and indemnities over matters within their control, from parties without the same degree of knowledge and for whose benefit they manage the company.
It may be reasonable for management to receive warranties in relation to issues which are outside the scope of their responsibility such as title to the shares, company assets and other matters on which the sellers should properly take the risk. It may be a matter of negotiation as to whether warranties should be given in relation to financial statements, taxation liabilities, and other matters which are independent of both the sellers and investors. This will be a matter of negotiation.
Core Sale Provisions
Completion Timing
Conditions and Completion
By the time there is a share purchase agreement, the key commercial issues will have been completed, negotiated and agreed. The outstanding matters may be a formality. In other cases, the gap between the share purchase agreement and completion date may be for convenience and logistical purposes only.
More commonly there will be conditions subsequent or conditions precedent which are distinct discrete matters which must be dealt with prior to completion. The obligations to be complied with may be those of either party, but they are more commonly those of the seller. The outstanding conditions typically relate to some matter outside the control of both parties such as (Governmental) consents, shareholders’ consents etc.
Conditions Precedent and Subsequent
Conditions may be conditions precedent or conditions subsequent. In accordance with general principles of contract law, a condition precedent is such that the agreement does not take effect until it has been satisfied or waived by the party for whose benefit it is inserted. A pre-condition can be waived by one party if it is for its exclusive benefit.
A condition subsequent implies that there are existing obligations and that one or other party, or both parties must take steps to achieve the condition. The failure to meet the condition may operate by its terms to unwind the agreement or release the parties from further obligations.
The agreement may provide that if it is not completed by a certain date or if certain pre-conditions or conditions fail to be satisfied, that each party is discharged or has the right to discharge the contract.
Effect of Non Completion
It may be provided that if the agreement is unwound by reason of its breach or the failure to comply with the conditions precedent, the innocent party has rights against the other party in respect to any prior or antecedent breach. This may include the failure on the part of the party responsible for making reasonable endeavours to procure the completion or satisfaction of the condition itself. In contrast to a condition precedent, if the relevant conditions do not occur, there may be simply no agreement at all, and no contractual obligations may come into effect.
The beneficial interest in shares does not generally pass until any preconditions are satisfied. For the purpose of Capital Gains Tax Acts and the disposal of shares, there is no disposal until the condition precedent has been satisfied. This is so, regardless of whether the condition is technically a condition subsequent or condition precedent provided that it is such that if it is not met, the agreement is ineffective or is discharged.
Common Extremal Pre-conditions I
In the case of larger scale companies, so-called mergers consent might be required from the Competition and Consumer Protection Commission. Where a certain share of the market is held by one or both parties, CCPC consent may be required. See the sections on Competition Law. This process may take some considerable time.
In some instances, there may be minority shareholders such as a venture capitalist or an enterprise agency such as IDA Ireland or Enterprise Ireland which has invested in the company. Its consent may be required to the sale. It may have the option to sell its sell its shares too.
There may have State grant aid by way of industrial policy incentive which is repayable in the event of a sale within a certain period. It may be a condition that this is not clawed back, or if it is clawed back that there is an adjustment in price.
Common Extremal Pre-conditions II
In some cases, some or all of the company finance arrangements may be taken over by the buyer. In other cases, the buyers may entirely refinance all loans and debt within the company, particularly where the company is essentially an asset holding company. If the company is a trading company, the buyer may wish for the company to maintain the existing funding arrangements.
Generally, the change of control at shareholder level is sufficient by itself to enable the bank to withdraw credit facilities. It may be a condition that the target’s company’s bank consents to the sale on terms that are acceptable to the buyer.
The consent of the shareholders of either the seller or the buyer or both may be required. If the buyer is a public company, certain transactions must be approved by the body of shareholders.
When the target company’s assets comprise mainly of real property in Ireland, a Capital Gains Tax clearance certificate may be required.
Pre-Conditions; Completion of Due Diligence
The above conditions are largely matters outside the control of both parties. In some cases, there may be outstanding due diligence issues which require the verification of distinct matters.
There may be preconditions which require that the buyer be satisfied, or that proof be given to the buyer that certain matters are in order and correspond with the buyer’s expectations. For example, the buyer may require that its solicitor is satisfied with the company’s title to the properties as well as statutory compliance matters.
It may be provided that the buyer is to be satisfied that there has been no material adverse change in the business or circumstances of the company since the accounts date. The accounting date may or may not be relatively recent. There may be a further date based on later management accounts.
Pre-Conditions; Completion of Due Diligence
Pre-conditions may be provided in some cases where the due diligence has not been completed or where there are outstanding issues but for which the due diligence process would be completed. Such pre-conditions may not be acceptable to the seller in many cases given the discretion they confer on the buyer. They may be provided where one or other party requires a binding agreement.
It may be provided as a condition that the buyer be satisfied that there has been no material adverse change in the business or circumstances of the company since the accounts date. This may arise from matters arising after the accounts-date which may be some weeks or months before the date of completion of the agreement.
It is commonly provided as a condition precedent that the warranties remain true and applicable in all respects on the share purchase agreement date and the completion date.
It may be required that there be no material loss or damage to the key assets, property etc. of the company due to some supervening event such as fire, before the completion date. The absence or presence of insurance is irrelevant as the buyer will not usually wish to simply inherit an insurance claim if he expects to purchase an entity with particular key assets which it expects to commence to use.
Maintain Status Quo
The precondition that the warranties remain true and applicable is generally accepted as reasonable given that the matters are largely -or entirely within the seller’s control a usually relate to matters which can undermine the value of the company to the detriment of the buyer.
Additional conditions may be appropriate to the circumstances. Specific issues may arise which must be completed such as for example, negotiations with key customers, employees and suppliers.
Where there is a gap in time between the share purchase agreement date and completion, there are generally clauses providing for continuation of business and ongoing obligations to ensure compliance with the preconditions by the completion date.
There may be an express right for the buyer to waive all or certain pre-conditions which are exclusively for his benefit.
Co-operation
The seller may be obliged to facilitate the completion of due diligence by promptly responding to outstanding queries, maintaining goodwill and, trading in the normal course and maintain the goodwill of customers, employees and suppliers. It may be obliged to carry on business in normal course with a view to a profit in a manner consistent with buyer’s reasonable expectations.
It may be a requirement that the seller consults with the buyer in respect of important matters or key decisions. The company may be restricted from undertaking any significant action in relation to the company without the prior consent of the buyer. In effect, the company should be managed for the benefit of the buyers, so that its value is maintained until completion.
Applicable Law and Jurisdiction
In some cases, where there is an international element, the choice of law and the forum or court before which disputes may be heard may be a significant issue. English, Northern Irish and Irish contract law and practice are broadly similar.
Where a company is governed by Irish company laws and subject to Irish taxation and other legislation, then Irish law and Irish courts are usually the most appropriate forum. Otherwise, the court may be unfamiliar with the legal context and culture, and independent expert evidence may be required of the relevant foreign law.
A clause providing that disputes are to be referred to arbitration may be appropriate, particularly in sales with an international element. In some cases, an arbitrator may be a relatively speedy and efficient means of determining the dispute.