Initial Issues
Heads of Agreement
It is common for “heads of agreement” or “heads of terms” to be entered at an early stage in a share purchase or asset purchase transaction. The expressions mean much the same thing and refer to a non-binding agreement in principle. The heads usually set out the principal terms of the purchase and sale, in non-binding terms. The heads of agreement often contain a binding provision in relation to confidentiality, exclusivity and fees.
Once a decision is taken to sell shares or assets, the vendor will generally want to keep a number of matters confidential. This will include the fact of the negotiations and confidential business information that may be disclosed in the course of due diligence. A confidentiality agreement imposes a duty of confidentiality on the buyer in respect of information disclosed in relation to the target company in the course of a prospective sale.
Confidentiality
A written confidentiality agreement is desirable as the common law of confidentiality is uncertain in scope. It creates a simple obligation which is easy to enforce and understand, makes the obligation of the parties clear. Although it may be possible to obtain an injunction to enforce the agreement, it may not be possible to anticipate that a breach is about to take place. Once information is disclosed, it may be too late.
Once information is in the public domain, no confidentiality agreement will make it secret. Damages may be the only remedy but they may not be adequate. Proving a breach can be difficult. Even if there is no intentional breach, it is difficult to prevent to the recipient of information from taking account of the information, once it is known.
Exclusivity
A buyer may require exclusivity in return for its investment of time and resources in advancing a proposed transaction. The buyer will not want the risk that a third party will gazump him prior to a legal agreement being reached. For this reason, exclusivity obligations are often entered at an early stage. The exclusivity obligation will have a set period, which may be extended by agreement.
The exclusivity and confidentiality provisions in the heads of agreement will usually be binding, even if the heads of terms itself is not binding. Despite the above practical limitations, confidentiality agreements are useful and advisable.
Advisors Involved
Commonly, a number of specialist lawyers, advisors and other specialists are involved in undertaking due diligence on particular areas and reviewing the content of the agreement, tax deed and disclosures. Commonly specialist tax accountants review taxation issues.
The buyer’s accountants or financial advisors will consider the financial and accounting due diligence issues and whether the accounts conform with the buyer’s commercial expectations.
Specialist property, pension, employment and other lawyers may be involved from the buyer’s and seller’s side in the negotiation and conclusion of the final draft agreements and completion documents.
Share v Asset Purchase I
The two principal means of acquiring a business are by way of an asset or share purchase. An asset purchase may involve the purchase of some or all the assets of a business, usually without the assumption of historical liabilities. In the case of a share purchase, the company is purchased with all assets and liabilities within it. The purchaser will not be direct owner of the assets or be subject to the liabilities. He will own the shares but the value of the shares will depend on the assets within the company, net of the liabilities.
Sometimes, a particular business within a company may be packaged into a new company by way of re-organisation and that company will then itself, be sold. This is commonly called a “hive off” or “hive-down” and is often undertaken in the context of insolvencies of existing companies. Stamp duty and other tax reliefs are generally available on transfers between UK companies although the relief may be lost on subsequent disposals to third parties.
Share v Asset Purchase II
The purchaser of a company takes it lock, stock and barrel, subject to all existing liabilities and claims (within the company). Accordingly, the warranties and indemnities required in a share purchase will be substantially greater. An asset purchase may be preferable in that there may be concerns about past unquantifiable and unknown liabilities. With an asset purchase, it may be possible to cherry pick assets.
With an asset purchase, only the selected assets and liabilities are acquired. An asset purchase may involve the transfer of separate assets making up the business. It is more likely that the consent of third parties will be required in the case of an asset sale than in the case of a share purchase. Properties held under leasehold or business contracts with third parties will generally require the consent of the third party to the change of identity occurring upon the sale of the assets.
Auction arrangements
Where a target company is sold by a controlled auction, the seller and its advisers prepare and circulate an Information Memorandum about the company. The format and content will be a matter for the seller. It will generally summarise the key investment considerations. It may also contain financial information analysis, key personnel, markets and other appropriate information to enable prospective purchasers to appraise the value of the company.
Buyers will be required to sign a Confidentiality Agreement and a draft Share Purchase Agreement will be produced. They may be asked to mark up the seller’s draft Share Purchase Agreement and submit any amendments they propose, with an indicative offer.
The seller will then draw up a short list of bidders, who will be given access to a data room. A data room can now be accessed online. It will be strictly controlled. It will contain key documentary information about the company for sale.
The advantage from a seller’s point of view is that there are other interested parties potentially available. The buyer may find its bargaining powers severely reduced. Typically in a two-party transaction, the document will start as the seller’s document and the buyer will seek to negotiate more favourable terms.
Share Purchase Agreement Desirable
In strict terms, there is no requirement for a share purchase agreement. However, for reasons set out in other sections, a share purchase agreement is highly desirable, in particular (although not exclusively) from the buyer’s perspective.
In its absence, the buyer would take the shares and the company as it is on the day of completion, with any number of potential liabilities, risks and uncertainty which would undermine his assumptions about its value. There would be arbitrary effects in relation to a range of matters which would not meet the parties’ reasonable expectations.
The tax deed of indemnity is usually a separate document. It may be set out in the schedule to the Agreement in an agreed form, to be executed as a standalone separate document upon completion. The tax indemnity is dealt with in a separate chapter. It will have its own definitions, clauses, and contractual terms. They will generally conform with definitions in the share purchase agreement.
Forms of Agreement
There are a number of commonly used forms of share purchase agreements. Most have broadly common terms and originally reflect United Kingdom practice. A number of Irish bodies have produced precedents. Most of the larger solicitors’ firms use their own forms of the draft, tailored to the buyer or seller’s interest, as the case may be.
A number of UK legal publishers have produced draft share purchase agreements with sample clauses for variations. These need to be adapted carefully to the Irish position, given the significant differences in taxation, pensions and other areas. They are useful in providing drafting clauses for more unusual mechanisms that are jurisdiction neutral.
There is no single form of Share Purchase Agreement in use. The Dublin Solicitors Bar Association publishes a precedent which is commonly used. Most Irish precedents are based on published UK precedents. Many legal firms have developed their own suite of precedents, in consultation with tax advisors, which follow the same broad format, but with significant modifications to reflect the nature of the company, the particular commercial terms or a seller or buyer bias.
The most common forms of share purchase agreements run from 60 to well over 100 pages in length. A substantial amount of the text deals with the mechanism of transfer. This includes, in particular, the steps to be taken on completion, the mechanisms in relation to the final determination of the price, payment and the retention of funds and security for payment of retained funds. In most cases, the bulk of the text comprises a schedule of warranties. In some cases, other key documents may be exhibited in a schedule in order to set their agreed form.
Drafting the Share Purchase Agreement
The share purchase agreement is usually drafted by the buyer’s solicitor in the first instance. The seller’s solicitor will make comments, usually using red-line amendments on a draft. The parties commonly furnish their amendments redlined against the previous draft in PDF form together with a clean, soft form of the relevant draft.
Typically, several drafts of the share purchase agreement and ancillary documents such as the tax deed and letter of disclosure are exchanged before the final form is agreed. There may be a meeting of the parties at some point to resolve outstanding issues.
In some cases, the seller’s solicitor and advisors may prepare the draft agreement. This may occur where a number of buyers are interested, and a competitive bid arrangement is put in place, at least in order to identify the favoured bidder.
The drafting solicitor will require significant information in order to draft the share purchase agreement or to consider and amend the buyer’s draft. There will require comprehensive instructions to be taken across a range of legal issues affecting the company.There may be considerable negotiation of the terms of the ultimate form of agreement, depending on the value of the transaction, the available time and resources and the sophistication of the participants.