The acquisition of any private company or business can be divided into 5 distinct phases – transaction planning and preliminary issues, due diligence and investigation, the preparation and negotiation of the share purchase agreement (“SPA”) and ancillary documents, the completion phase, and, finally, the post-completion phase. Often different phases overlap.
During each phase of any potential transaction, it is important to keep focussed on the key reasons for the transaction and to continually re-assess the merits of the transaction in terms of the proposed deal that has been struck.
In this article, we provide an overview of each of the above 5 transaction phases. If you would like more details in relation to any transaction phase or would like to discuss a potential or existing transaction, please contact us by telephone or by email at firstname.lastname@example.org
Initial negotiations between both parties will usually lead to them agreeing, in informal terms, to the basis of a deal. The parties will generally seek to record the broadly agreed deal terms and therefore sign heads of terms (which is often also referred to as a 'letter of intent' (“LOI”) or 'memorandum of understanding' (“MoU”)).
The heads of terms will often be expressed as not being legally binding, but simply act as a record of the deal struck and allow the parties to set out their intentions and assumptions (especially as concerns consideration and deal value) at the outset, thereby providing a point of reference as the parties' positions change following due diligence enquiries and negotiation of the share purchase agreement.
The parties are also likely to enter into other documentation to establish binding provisions concerning confidentiality and exclusivity. These provisions can sometimes be included in the heads of terms, or otherwise be dealt with separately in the form of a separate letter or agreement.
It is important to bear in mind that requests for significant changes to heads of terms, after they have been signed, can unsettle the other party and lead to distrust between the parties and make it more time-consuming to complete a transaction or even result in the collapse of a transaction. Equally, clear and well thought-out heads of terms can help make a transaction run smoothly from start to finish. Therefore, it is important to be clear as to the reasons for the transaction, identify potential risks and contact your professional advisers at an early stage.
Phase 2 – Due diligence and investigation
Due diligence will normally be carried out after the parties have signed heads of terms and put confidentiality provisions in place. The due diligence process will then run concurrently with the negotiation of the SPA and related ancillary documents. The majority of the due diligence should be conducted during the early stages of the transaction so as to ensure that the parties can negotiate appropriate warranty and/or indemnity cover in the SPA.
The buyer will conduct legal, financial and accounting due diligence into the seller and the target company in order to obtain information, inform its negotiations and plan for the integration of the target company into its existing group. This involves instructing advisers to review and report on different areas, as appropriate. The buyer's legal advisers will therefore conduct legal due diligence, issuing a legal due diligence questionnaire and then reviewing the seller's replies and information supplied. Although advisers will report back to the buyer (and other advisers, as appropriate) throughout the process, they should may also prepare a due diligence report (addressed to the buyer), which should highlight material issues arising from the review.
Due diligence must not be confused with disclosure, which is the seller’s principal means of protecting itself against potential liability for breach of warranty. The seller prepares a disclosure letter in which it will make a series of specific disclosures (meaning disclosures against specific warranties), as well as general disclosures (disclosures of certain matters in the public domain, searches and registers and groups of documents). Both the specific and general disclosures are likely to be subject to considerable negotiation. Disclosure and due diligence are, however, interlinked processes and information gained in the due diligence process will help inform the disclosures made by the seller in the disclosure letter.
The legal due diligence process is usually co-ordinated by the buyer’s solicitors. They will work with the buyer’s accountants and other appropriate professional advisers (each of whom may end up reporting back to the buyer separately with their findings from the due diligence). Specialist legal advisers may be needed to help with a variety of potential specialist issues, such as pensions and environmental law.
Phase 3 – Preparation and negotiation of the SPA and ancillary documents
During this phase, the main transaction documentation will be drafted and negotiated, centring around the negotiation of the SPA. Although the formalities of transferring legal title to the shares will be dealt with by the execution of one or more stock transfer forms (depending on the number of shareholders and categories of shares) , the parties will enter into a SPA, which can become a detailed and heavily negotiated agreement. This sets out the terms on which the sale is to take place, including the purchase price and payment mechanism, any conditions precedent to completion, any arrangements for completion, any post-completion restrictions, any warranties and indemnities and any limitations on the seller’s liability.
Preparation of a first draft of the SPA can begin at any time after the main commercial transaction terms have been agreed and the heads of terms have been signed. The due diligence and disclosure process will usually run concurrently with the drafting and negotiation of the SPA. The earlier that substantive due diligence is conducted by the buyer, the sooner the findings of the due diligence can inform the negotiation of appropriate warranty and indemnity cover in the SPA.
The drafting and negotiation of the tax covenant will usually commence once a draft SPA is in circulation (so that it can be referenced in the tax covenant and so as to ensure consistency of definitions and deal terms). Drafting of the ancillary documents will begin once negotiations of the SPA are fairly advanced, depending on which ancillary documents are required.
In addition to the SPA and tax covenant, a number of 'ancillary' documents may be required to be prepared and negotiated including board minutes, company resolutions, deeds of contribution between selling shareholders, guarantees, loan note instruments, escrow agreements and retention arrangements.
Phase 4 – Completion
Completion of the SPA will take place either simultaneously with signing and execution of the SPA, or at a later date. If there are conditions to completion, it will be at a later date (split exchange and completion) and if there are no conditions then completion will usually be simultaneous.
A share purchase transaction will be concluded with completion. At completion, the requisite formalities to complete and implement the transaction are undertaken. Both exchange and completion may occur either face to face or virtually (by way of telephone call and/or email).
The buyer usually becomes beneficial owner of the target company’s shares after all completion formalities (including payment of such part of the purchase price as is due to be paid at completion) have been completed or waived. Transfer of the legal title to the target company’s shares will not be completed until any stamp duty has been paid and the new shareholder(s)’s name(s) entered in the target company’s register of members.
The parties will need to ensure that they are each clear as to which documents must be prepared/negotiated/executed/handed over (as appropriate) at exchange and completion. The SPA will normally include a list of documents that each party must execute and hand over at exchange and completion. However, it is also common to prepare a separate list of documents, by way of checklist.
Phase 5 – Post-completion
The amount of work required following completion will vary according to the transaction. Most of the tasks which fall to be done in the days following completion (and which will need to be done following completion of all share purchase transactions) will be for the buyer's lawyers to undertake, given that responsibility for the target company's affairs passes to the buyer and its lawyers.
Depending on the valuation and consideration mechanisms used in the transaction and set out in the SPA, there may be calculations, adjustments and payments to be made in the post-completion period (for example, if completion accounts are to be prepared or deferred consideration must be calculated). Much of the work in these circumstances will fall to the buyer's accountants and the buyer itself rather than the lawyers, unless there is a dispute between the buyer and seller. However, the lawyers for both buyer and seller are likely to be involved if the buyer makes a warranty or indemnity claim.
If you would like more information or would like to discuss a potential or existing matter, please contact us by telephone or by email at email@example.com