Legal documentation required when buying or selling a company
In this article, our Head of Corporate & Commercial Solicitor, Yao Trinh, and Corporate & Commercial Solicitor, Amara Akhtar, cover the essential documentation required for successful M&A transactions. They provide valuable insights to help business owners streamline the process, mitigate risks, and confidently achieve their business goals.
For business owners in the UK contemplating the sale or purchase of a company, the process can seem daunting—especially when it comes to the array of documents involved. While a handshake might seal a partnership, it’s certainly not enough to finalise an M&A transaction. Clear, detailed, and legally sound documentation is critical to protecting all parties and ensuring the deal proceeds smoothly.
From confidentiality agreements to share purchase agreements and beyond, understanding the key documents required can make the difference between a seamless transaction and one fraught with complications. In this article, our M&A Solicitors in London provide valuable insights to the essential documentation required during the buying or selling process, explaining their roles, importance, and how they help manage risks while ensuring transparency.
Below are some of the key documents that are needed during the M&A process:
Confidentiality agreement
Also known as a non-disclosure agreement or NDA, the confidentiality agreement is entered into by a potential buyer and the seller of the company to ensure that any information about the proposed sale of the company and negotiation or discussion about the proposed transaction is kept completely confidential and may only disclose information about the proposed transaction where either party is required to do so under UK law or other law that is applicable to that party. This is vital for all parties as it protects the party disclosing any confidential information from the other party using that information for improper purposes, giving each party confidence to discuss the potential transaction in detail and a form of redress should either party breach the confidentiality agreement.
Heads of agreement
This document, which is sometimes known as heads of terms, a terms sheet or memorandum of understanding, summarises the key terms upon which the buyer will agree to buy the company from the seller. This is often signed around the same time as the confidentiality agreement and before the buyer has done any due diligence on the target company. As a result, the heads of agreement is generally not legally binding except for a few provisions such as exclusivity, confidentiality and any costs if the transaction is aborted. It does, however, carry weight and parties will struggle to deviate away from any key terms agreed when negotiating the share purchase agreement without a strong reason to do so.
Share purchase agreement (SPA)
The SPA is the most fundamental document which is negotiated when buying or selling a company. While there isn’t a legal requirement to have a SPA, it is generally a standard practice for the parties involved to have a very detailed (which ends up being lengthy!) SPA when there is a sale of the entire share capital of a company. There are a number of reasons why a SPA is used when buying and selling a company:
It records all the commercial terms upon which the buyer agrees to buy the shares of a target company from the seller, so it is clear who is selling what, to whom, when, for how much and any other terms agreed.
It would specify any conditions which the transaction is subject to and must be satisfied or waived before the buyer agrees to complete the transaction.
It manages and allocates the level of risks agreed between the buyer and the seller.
Terms in the SPA
As mentioned, the SPA will contain very detailed and extensive commercials terms that are agreed between the buyer and the seller. Some of the key provisions typically covered include:
Conditions precedent: it may be necessary for the transaction to be made conditional on certain matters occurring first. For example, obtaining regulatory approval for the sale of the shares of the target company.
Price: What is the price of the shares? How will it be satisfied, i.e. by cash, issues of shares, loan notes or a combination of some or all of them? How will the cash payment be made, i.e. by bank transfer to a nominated account? Is the purchase price fixed or subject a price adjustment such as completion accounts or an earnout based on the future financial performance of the target company?
Warranties: because English law provide little statutory or common law protection for a buyer of shares in a company in relation to the nature and extent of the assets and liabilities it is acquiring, the buyer will usually insist the seller gives extensive contractual assurances, known as warranties, about the target company, its legal, financial and business affairs and assets as well the sellers ownership and right to sell the shares of the target company. For example, the seller might be required to warrant that it is not aware of any current or pending litigation against the target company. If that warranty is untrue when given at completion, then the buyer will have a claim for breach of warranty unless it has been “disclosed” (see “Disclosure Letter” below). Any successful claim for breach of warranty will result in the seller paying damages to the buyer, or if the full purchase price has not yet been paid, the buyer may be able to set-off the relevant amount from what it still needs to pay to the seller. Due to the nature of the warranties and the things it would cover, it is not uncommon for warranties to take up almost half of the SPA!
Warranty limitations: To try and mitigate the risk of a claim against it under the warranties, the SPA will often include limitations around the buyer’s ability to make a claim for breach of warranty. The seller will seek to negotiate these limitations which will normally include: (i) issuing a disclosure letter to the buyer detailing any exceptions to the warranties (see below); (ii) setting de minimis thresholds before a claim for breach of warranty can be considered; (iii) a financial cap on the seller's aggregate liability for breach of warranties; and (iv) requiring that any claims for breach of warranty must be made within an agreed time period after completion.
Indemnities: If during the due diligence (for more details on this please refer to our article here) the buyer discovers an issue that cannot be rectified or resolved prior to the completion, the buyer would often require an indemnity from the seller to cover any financial liability that arises from that issue. An indemnity is a contractual promise where one party will reimburse the other party (in this case, the seller making the promise to the buyer), typically on a pound for pound basis, should a specified known liability arise.
For example, if during the during the due diligence exercise, a seller discloses that an ex-employee has brought a claim against the target company for unfair dismissal and it will not be settled before the completion of the sale of the target company, the buyer may negotiate an indemnity from the seller to pay to the buyer the sum of all liabilities, losses and costs that arise from that employee claim. Such an indemnity allocates all the financial risk of the claim to the seller.
Restrictive covenants: To protect the goodwill of the target company, the buyer will usually require the seller to undertake that it will not effectively be involved with any business that competes with the target company or poach its customers, employees or suppliers for an agreed period of time after completion. It will also often require the seller not to use the name(s) of the target company at any time in the future.
Completion: The specifics of completion of the transaction will be detailed within the SPA. These will include the date of completion, any steps to be taken in order to complete and any ancillary documentation required to be delivered to the buyer and the seller at completion (see below).
Ancillary documents
While the SPA will set out all of the commercial terms to which the seller agrees to sell their shares in a company to a buyer, it alone is not enough to complete the sale. The SPA will often list a number of other documents that are required to be entered into before the buyer is willing to complete on the transaction. The documents required often include the following:
Disclosure letter - the seller will generally prepare a disclosure letter which sets out both general and specific disclosures against the seller's warranties in the SPA. As mentioned above, the starting position in relation to warranties are that if any are untrue, then the buyer will have a claim for breach of warranty, however it is typically agreed in the SPA that no claim will arise if the facts giving rise to the breach has been disclosed with sufficient detail in the disclosure letter. This is therefore a key document in protecting the seller against potential breach of warranty claims under the SPA.
Tax deed – sometimes known as the tax covenant, the purpose of this document is to apportion liability between the buyer and seller for the target company’s pre-completion tax liabilities. It is essentially a form of indemnity given by the seller to the buyer for the target’s unpaid pre-completion tax unless it falls within an agreed exception. Sometimes this document forms part of the SPA itself.
Stock transfer forms – this is the document that formally transfers the legal title of the shares in the target company from a seller to a buyer. This must be duly completed and executed by the seller. Once stamp duty has been paid on the stock transfer form is stamped, the buyer can then be recorded as the holder of the shares in the target company’s statutory registers. Only then will the buyer have legal title to the shares of the target company.
Share certificate/indemnity for lost share certificate – all share certificates evidencing the seller’s ownership of shares in the target company will need to be delivered to the buyer on completion of the sale. If no share certificate can be provided, then the seller will be required to give an indemnity in respect of the lost certificate.
Security release – If the target company has granted any security over its assets or shares over any of its borrowing, it is generally a condition that the seller arranges for the release of the securities before the sale of the target company can take place.
Service agreements – if the seller and/or any key employees are to remain with the target company after the sale of the target company, the buyer may require that the seller/key employee enter into a new service agreement (or consultancy agreement) to reflect the new working arrangement.
Resignation letter – alternatively, if the seller is to leave the target company after completion, they (and often any person connected to them that are a part of the target company) will be required to deliver documents to confirm their resignation (as an employee, a director or any other capacity) and that they have no claims against the target company. A settlement agreement may also be required.
Board approvals – if the seller and/or the buyer are corporate entities, then it is usually necessary for each of them to hold board meeting to approve the transaction and all the documents required to give effect to the transaction. The board meetings are usually evidenced by way of board minutes which would set out the relevant board’s decision on whether to proceed with the transaction and any individuals who are authorised to enter in the SPA and other documents on its behalf.
The target company should also hold a board meeting to approve the transfer of the shares from the seller to the buyer and record the buyer as the holder of the shares in its statutory registers (subject to the stock transfer form(s) being stamped) as well as any other changes to the target company as agreed between the parties.
The ancillary documents listed above is non-exhaustive - each transaction is different so each transaction will require different ancillary documents and on different terms.
How can Dragon Argent help?
Dragon Argent’s mergers and acquisitions advisors can guide you through the M&A process from beginning to end and beyond!
The synergy between our tax, legal and advisory teams means that we are uniquely positioned to provide comprehensive advice and ongoing support from structuring and negotiation of the deal to integration post transaction. Schedule a call with one of our M&A transaction advisors today to discuss the prospective sale of your business.
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Written by:
Head of Corporate & Commercial Solicitor
Corporate & Commercial Solicitor