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We acted for the sellers in relation to the sale of the entire issued share capital of a company with numerous subsidiaries and different service lines. The purchaser was a company backed by private equity offering a purchase price of over £23m.
Although each transaction is different we do find that there are issues that often arise and need to be resolved. The earlier we can identify those issues and resolve them the better as this deals with our need to ensure legal compliance, reduce legal and documentation risk, and hopefully avoid the costly and time-consuming need to remedy an issue later on in the transaction.
During this transaction, the issues we addressed and resolved for our client included :-
1. Numerous shareholder sellers with different objectives
2. Who do we take instructions from? About the sellers’ representatives
3. Do you need a Contributions Agreement?
4. What if the buyer doesn’t want to buy all the business? Example of a hive-down
5. How to deal with an EMIS scheme
6. How to deal with large scale due diligence
7. Negotiation of the transaction documents: made easy
The problem: if there are a large number of shareholders, who to act for?
The shares in the target were held by 16 individual shareholders which presented us with the problem of there being a potential conflict of interest if we acted for all of them all, in particular if there was a particular issue that they couldn’t all agree on.
As we have to act in the best interests of our clients, if we are faced with two or more clients that can’t agree on a matter then we are faced with a conflict of interest and have to stop acting for them all. Even if there is a possibility of a conflict arising then we can’t act for the clients unless, 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. If there is a large number of clients then the possibility of a conflict of interest increases. In addition, it isn’t always appropriate to have all the shareholders as clients, for example, many of them held only a few shares.
The solution: only take on the main shareholders as clients
We explained the situation to the clients that there was a risk of a conflict of interest. After discussion, we agreed that the individual shareholders holding more than 15% of the total shares would be our clients and then share the documentation and our advice with the minor shareholders. We advised that all the minor shareholders could seek independent legal advice if they wished.
The problem: ideally we only want to take instructions from 2 clients
We identified five main shareholders who would be our clients, however, this was still quite a large number and communicating with them all, and taking instructions from them all, was not practical.
The solution: appoint 2 sellers’ representatives
We asked the clients to nominate two key people to provide us with instructions, one person dealing with the commercial issues, and another dealing with financial matters. The two key shareholders then held regular meetings with the other shareholders to discuss the issued that needed decisions. The two shareholder representatives then further broke down the different tasks to their colleagues and provided the instructions to us.
The problem: all sellers had to give warranties but some were not involved in management
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.
The solution: prepare a Contribution Agreement
It was decided the sellers would all enter into a Contribution Agreement to complement their common law rights, and to allocate liability between them. The sellers decided that 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) except where a responsible person was negligent in giving a warranty (in which case all liability would be on that person).
The problem: the buyer didn’t want to buy all of the business
The buyer decided that certain parts of the target’s business were not relevant to the buyer’s key sectors and that they should be removed from the target before the completion of the sale.
The solution: transfer the unwanted parts of the business into a separate company
We prepared documentation to transfer the parts of the business that the buyer didn’t want to buy out of the target company. This hive down was the first part of the transaction to complete.
The problem: the company being bought had an EMI scheme in place
The target had an EMI scheme in place and there was a need to exercise share options allocated under it. 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 EMI scheme 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.
The solution: exercise all the options
We prepared all the documents to exercise the options and to allow the new shareholders to enter into a Shareholders Agreement.
The problem: large scale due diligence
As the risk is on the buyer in a share purchase, the buyer will want to reduce that risk by carrying out due diligence of the target and having a range of warranties in the Share Purchase Agreement. In a transaction where the parties are not known to each, the role of due diligence is very important as it allows the buyer to conduct a thorough review of the target.
The process of due diligence is one of the buyer asking various questions about the target and the information supporting the replies being provided to the buyer. The information is usually collated in a data room and can amount to thousands of pages of information. The buyer and its team of advisers will go through the information so that it has a much better idea of how the business is managed. If there any problems identified through the information then the buyer will discuss how they can be resolved with the sellers. As the key assets of most businesses are its property assets, its employees, and its customer contracts, particular attention is usually applied to these.
The solution: work closely with the clients to collate documents for a data room
The scale of due diligence was significant. The buyer undertook a very detailed review of the target that took several weeks. We uploaded thousands of pages of documents to the data room, and guided the clients through the issues raised by the buyer.
The problem: a large and complex transaction needing detailed negotiation
As the buyer and the seller are paying high transaction costs to their professional advisers, they will want to promptly progress the transaction to completion. In this particular transaction, the buyer’s solicitors issued the Share Purchase Agreement prior to the completion of due diligence with a view to quickly progressing the transaction. However, negotiation was tough and detailed in order to ensure a balanced set of documentation that was fair to all parties.
The solution: find solutions which both sides can accept and which get the transaction over the line
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.
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Partner - Corporate law
Nicholas is a Partner in our Corporate and Commercial team. He mainly operates out of Bedford, Peterborough, and London.
Nicholas qualified as a solicitor in 1995 with a City law firm. Since then he has gained significant experience in the City,...
