Sale of Shares
  • 8th Apr 2020
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This Case Study examines some of the issues which arose in a recent transaction.  Although each transaction is different, we do find there are common threads.  It is our view that if issues can be identified and resolved early on (hopefully prior to the Share Purchase Agreement being issued) then this can reduce the time taken in later negotiations. This particular case study relates to the sale of 100% of the shares in a company with numerous subsidiaries for about £23m.  We were instructed after Heads of Terms had been substantially negotiated.

Initial Considerations

  1. Conflict of interest:  as the shares in the target were held by 16 individual shareholders we first had to deal with conflict of interest issues which arise as a result of our professional regulations.  A conflict of interest means a situation where we have separate duties to act in the best interests of two or more clients in the same matter. We can act in such a situation, if, on the facts, there is no significant risk of a conflict arising and the clients have a substantially common interest in relation to the matter.  We explained the situation to the clients and agreed a way forward.
  2. Who will be our client? as there were a large number of shareholders it was not appropriate to have all of them as our clients.  After due consideration, it was decided that the main shareholders, those holding more that 15% of the shares, would be our clients and share our advice with the other smaller shareholders.
  3. Sellers’ representatives:  even though the number of shareholders who would be our clients had been reduced to five people, considerable coordination with this group would be needed.  Consequently, it was decided that one person would lead the negotiations for the sellers but the other four would be copied into all key correspondence and allocated certain tasks which fell within their commercial remit.
  4. Contribution Agreement:  the sellers were faced with the problem that they had joint and several liability under the warranties, indemnities, and the tax covenant, however, some sellers only had a small number of shares and were not involved in management, and others had a large number of shares and were Directors, and would receive £millions as proceeds of the sale.   It was decided between the sellers that their individual liability would be in proportion to the number of shares they held (which fitted with the cap on sellers’ liability being the purchase price).
  5. Hive down: it had been decided by the buyer (an English registered trading company backed by equity funds based in the USA and Canada) that certain parts of the business did not fit with the profile of the buyer and that they would not be included in the transaction.  This required the transfer of a business unit from the target to a newly incorporated company before completion of the sale.
  6. Enterprise Management Incentives Scheme (EMIS): the target had an EMIS in place and there was a need to exercise share options allocated under it. The EMIS is a type of employee share option that enjoys favourable tax treatment.  The options holders had to exercise their share options as the buyer wanted to buy 100% of the shares.  In addition, a requirement of the EMIS was that all shareholders enter into a Shareholders Agreement, which included ‘tag and drag along’ provisions such that 75% of the shareholders could force (or drag) the other shareholders to sell their shares, or equally the minority shareholders can force the buyer to buy their shares (or tag along) as well.
  1. Due Diligence
    1. As the buyer and the target were not known to each other (the buyer was funded by a private equity group based in the USA and Canada and had made numerous historical acquisitions in order to consolidate a particular market) then we knew that due diligence would be extensive and time consuming.  We set up a data room using a reputable third party data room provider and collated all the information being requested by the buyer. This amounted to thousands of pages of information.  The solicitors for the buyer went through all the documents and asked for additional information.
    2. During an all parties due diligence reporting meeting several difficult issues were raised by the buyer, as is typical in a transaction of this size.  Always be prepared for lengthy and challenging due diligence enquiries throughout the process.
    3. As the target had significant property interests and a large number of employees considerable time was spent focusing on property and employment due diligence.
  2. Negotiation of the transaction and ancillary documents
    1. Due to a tight completion schedule the buyer’s solicitors issued the Share Purchase Agreement prior to the completion of due diligence with a view to quickly progressing the transaction.  Be aware that however long the time table might seem at the beginning, it will invariably be a tight time table in the run up to completion requiring calm and reasonable negotiations between all parties in order to get it over the line.  The period in the last three weeks before completion is invariably the busiest so it is useful to ensure that none of the parties are on holiday and all have access to full working facilities.


    1. The structure of the transaction was such that the purchase price would be paid at completion but a small amount would be retained in order to pay for any additional payments to be made after the compilation of completion accounts (equally the buyer could have to pay the retention plus a further amount depending on the completion account figures).   Completion accounts are special accounts drawn up in relation to the target after completion in order to confirm the target’s financial position at completion, deal with pre-payments, and to calculate any adjustments in the purchase price that may be due.

This transaction was an interesting challenge for our clients as issues arose at all stages which needed to be quickly resolved.  We were able to guide them through the various stages of the transaction and assist them in dealing with both the practical and technical matters that arose. 

If you would like to discuss any matters set out in this Briefing Note please don’t hesitate to contact us.

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