When considering selling a company or its assets the key terminology and elements of these transactions need to be understood. The purpose of this month’s article is to provide some clarity to the expressions used and give an overview of a share or business sale.
What is meant by the term ‘acquisition’? An ‘acquisition’ involves a buyer acquiring ownership of the shares in a target company, or a business and its assets, from a seller or sellers.
What is meant by the term ‘target’ and ‘target business’?
The term ‘target’ refers to the company or business which is the subject of an acquisition. On a share acquisition the company whose shares are to be purchased is referred to as the ‘target company’ (or the ‘target’). If the target company has subsidiaries they are referred to as ‘target subsidiaries’. On a business acquisition the expression ‘target business’ is used to refer to the assets and liabilities comprised in the business being acquired.
Who are the parties?
On a share acquisition, the seller(s) will be the owners of the shares in the target company. On a business acquisition, the seller will be the owner of the target business or division being sold, which will typically be a company.
What are the key stages in a typical acquisition?
The process and types of documentation are generally the same in the case of both share and business acquisitions.
On an acquisition, the process is usually:
- negotiation of price and key commercial terms, and the conduct of some commercial and financial due diligence;
- the parties will negotiate and put in place agreements such as confidentiality agreements, exclusivity agreements and heads of terms;
- the buyer will commence a detailed due diligence exercise, usually by submitting a comprehensive questionnaire, and the seller will prepare a data room containing responses to the questionnaire and supporting documents;
- the first draft of the acquisition agreement will be prepared, usually by the solicitors;
- the seller will commence its disclosure exercise, alongside the buyer’s due diligence and the negotiation of the acquisition agreement;
- the parties will produce the ancillary documentation to be delivered on exchange and/or completion;
- the parties will proceed to exchange, which involves them committing to the sale and purchase of the target by entering into, and ‘exchanging’, the acquisition agreement and the seller will deliver the disclosure letter; and
- the actual transfer of legal title to the shares or assets will take place at completion, when all the formalities to effect the sale and purchase will be performed and the buyer will pay the consideration.
In many cases exchange and completion will take place at the same time (a simultaneous exchange and completion). This will not be possible if the acquisition is subject to conditions or if there are other requirements to be fulfilled before the deal can go ahead (commonly referred to as a split exchange and completion).
An ‘acquisition’ involves a buyer acquiring ownership of the shares in a target company, or a business and its assets.
Once completion has taken place, there will typically be post-completion matters which need to be dealt with. On a share acquisition it will be necessary to arrange for the stamping of the stock transfer forms with HMRC (which involves the payment of stamp duty) and for the target to file any requisite forms at Companies House. On a business acquisition there may be the need for payment of stamp duty land tax and to give notices to suppliers and customers.
What is the due diligence stage in an acquisition?
Due diligence involves the review of documentation and other records relating to the target company or business. It may also involve physical inspection of property and assets and discussions with the management team.
The principal aim of buyer due diligence is to obtain sufficient information about the target to:
- make an informed appraisal of the transaction and the agreed price; and
- enable the buyer to assess whether to proceed with the transaction and, if so, on what terms.
What are the main documents on an acquisition?
The main document is the share purchase agreement (or SPA) or the business purchase agreement (or asset purchase agreement, APA or BPA).
On a share acquisition, detailed contractual provisions dealing with the respective parties’ responsibilities for the target company’s tax liabilities will usually be included in a separate tax deed or in a schedule to the SPA.
On both a share and a business acquisition, the disclosure letter qualifies the warranties given by the seller in the acquisition agreement to prevent the buyer bringing a successful claim for breach of warranty in relation to the matters disclosed.
What is a warranty?
A warranty is a contractual statement of fact. The acquisition agreement will typically contain detailed and comprehensive warranties by the seller covering all aspects of the target business or, on a share acquisition, the target company and any group companies. If a warranty proves to be false, the buyer may have a claim against the seller for damages. The buyer’s right to claim damages for breach of warranty will be subject to the limitations and restrictions in the acquisition agreement.
Michael Budd is Partner and Head of Company Commercial at Longmores Solicitors www.longmores.law