FAQ’s
Please find below a selection of commonly asked questions that relate to our commercial and corporate services.
Please note: The content of this webpage does not constitute legal advice and is provided for general information purposes.
Do I need a Shareholders’ Agreement?
Where a business has multiple shareholders or is looking for equity investment then a Shareholders’ Agreement is advisable.
a. Early initiative: The best time to put a Shareholders Agreement in place is at the start of a venture while all parties are on good terms and should be acting reasonably. Once relationships break down it is very difficult (sometimes impossible) to achieve agreement on an exit or a continuation of the business, which can result in costly legal proceedings.
b. Objectives and preparatory steps: When forming a new company it can assist to include the objectives of the shareholders within a Shareholders’ Agreement, particularly if a party has made promises about the success or otherwise of the venture. Beyond financial investment, sometimes a shareholder may be contributing intellectual property and the agreement can ensure that this is properly transferred to the business or other holding entity or appropriate licencing arrangements are put in place.
c. Investment and holdings: Minority shareholders will expect certain protections such as tag along rights in the event a majority shareholder wishes to sell their shares, and shareholders generally may wish to have rights of pre-emption on share transfers or other restrictions on the transferring of shares. Where investment is being sought, the agreement can set out whether this will comprise debt or equity (or both) and the timing and procedures relating to the same.
d. Regulate decision-making: Decisions on how often board meetings should be held, when and how dividends should be declared and paid and what happens in situations of deadlock can all be made clear. Likewise, it is common for a Shareholders’ Agreement to set out matters which will require unanimous consent of all shareholders.
e. Everything comes to an end: A Shareholders’ Agreement can deal with the death or incapacity of a shareholder, or situations where a shareholder is failing to participate properly in the business or has committed an act of default. Likewise, not all parties will have the same time horizons and some may want out sooner than others.
What different types of intellectual property are there and how can they be protected?
a. Patents: A patent protects something that you have invented. There are different types of patents, each protecting different aspects of an invention for a specific period. This form of protection is vital if you are in the business of technological innovation.
b. Trademarks: Trademarks protect symbols, names, and slogans used to identify goods or services. This protection is about brand identify, preventing others from using a substantially similar mark in a way that could confuse consumers. Trademarks can be protected through registration with the Intellectual Property Office (IPO).
c. Copyrights: Copyrights protect original works of authorship, including literature, music, and artworks, by granting the creator exclusive rights to use, reproduce, distribute, and display the works. This protection is crucial for businesses in the creative industries.
d. Trade Secrets: Trade secrets encompass proprietary business information that provide you with a competitive edge, such as formulas, practices, processes, or compilations of information. Entering non-disclosure agreements (NDAs) with third parties and ensuring employees and subcontractors are contractually bound by confidentiality are common methods to protect trade secrets.
What are the main things to consider when acquiring a business?
a. Purchase Price: Purchase price is typically the foremost, and often the most complex, issue for the
parties involved in a corporate acquisition. A business’s value has different measures, known as enterprise and equity value, and both of these measures should be considered when agreeing the purchase price.
Next you will need to determine whether the price is a fixed sum or subject to a price adjustment mechanism. Price adjustment is common for the very reason that the value you put on the target company today may be different by tomorrow. It normally takes weeks, if not months, to complete a business acquisition and, within that time, it is likely that the value of the company could have changed.
Price adjustment commonly comes in two forms:
- Completion accounts: this allows the final purchase price to be calculated after the transaction has taken place, by reference to accounts relating to the target business which are drawn up to the completion date. If the value has fallen, then the purchase price will be reduced. If it has increased, then the buyer will be expected to pay the difference.
- Locked box: this involves accounts being prepared as at an agreed date prior to completion and then “locked” to prevent subsequent adjustment. Any “leakage” of value is controlled by specifying certain transactions that cannot be undertaken by the target business during this period, and which might otherwise cause its value to fall.
Lastly, agreement must be reached on how and when the purchase price is to be paid. It is rare that a buyer has the cash available to pay the purchase price in one go on completion. Instead, some of the consideration is often deferred and may be linked to the performance of the business (known as an “earn out”). This is another mechanism that protects a buyer from any decrease in the value of the business post completion.
b. Exclusivity: Usually agreed at the Heads of Terms stage, exclusivity ensures that the seller only
has eyes for you and prevents them from touting for better offers elsewhere. This is important because a buyer does not wish to start incurring the legal, accountancy and other professional services costs to move forward on a deal, only to have the seller change their mind and go with someone else.
c. What am I buying? Principally, there are two main methods of acquiring a business, each with different implications and considerations.
- Asset purchase: an asset purchase involves acquiring a bundle of assets and rights, and sometimes assuming certain liabilities, which together comprise the target business. This method is often more complex due to the need to transfer each of the separate assets constituting the business, which requires more consents and approvals. However, it also provides more flexibility, especially when a target company has liabilities that you do not wish to inherit, or if only part of the target company is to be acquired. An asset purchase is likely to be the only viable option in situations where the target business is operated by a sole trader, partnership, or other type of trading vehicle that does not involve shares.
- Share purchase: a share purchase involves acquiring all the shares in the company which carries on the target business. This method is structurally simpler and, unless the parties agree otherwise, there is no change in the underlying ownership of the various assets and rights or responsibility for the liabilities that collectively comprise the target business. This is, however, a ‘warts and all’ approach in that all the company’s assets, liabilities and obligations become those of the buyer, including those that the buyer may not know about.
Separately, each method will result in different tax implications; however, this goes beyond the scope of this article.
d. Due Diligence: As much as a buyer may think they know everything about a target business, completing due diligence will always uncover something unexpected.
Due diligence investigates the target business, reducing the potential for unwelcome surprises after completion, or potentially before completion which could lead to the transaction being aborted and plenty of wasted costs. Ultimately, due diligence provides an opportunity to identify any issues that need to be reflected in the acquisition agreement, such as an indemnity from the seller to cover the costs of a threatened employment tribunal claim, or making completion conditional on the seller obtaining certain third-party consents.
Linking back to purchase price, the process of due diligence can also be used to adjust the commercial terms of the transaction, like reducing the purchase price or introducing staged payments.
Finally, on a practical level, it allows the buyer to learn more about the target business and its operations, identifying the steps required for integration or restructuring post completion.
e. Documents galore: To protect a buyer’s interests, a business acquisition often involves many documents. Aside from the Disclosure Letter, these tend to be drafted by the buyer’s solicitors first and then negotiated with the seller. A short summary of the main transaction documents is provided below.
- Heads of Terms: Preliminary agreements such as Heads of Terms, Letter of Intent, Term Sheet, and Memorandum of Understanding outline the main proposed terms of the acquisition, including the deal structure, price, timing, and key terms of the transaction. These are typically non-binding but certain aspects such as confidentiality and exclusivity (see item 2 above) can be made binding.
- Acquisition agreement: The acquisition agreement (Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA) – see item 3 above) is the key transaction document that governs the terms of how the acquired shares or assets transfer from the seller to the buyer. It includes, for example, provisions dealing with calculation and payment of the purchase price, transaction warranties, and restrictions on the seller’s post-completion activities.
- Ancillaries: These are documents that support, and are ancillary to, the main transaction documents, such as board and members resolutions, director resignations, indemnities for lost share certificates, and stock transfer forms. There may also be separate agreements, such as a consultancy agreement (where the seller is to provide continued support post completion), settlement agreements to compromise any potential claims of departing staff, and facility and security agreements where debt is being used to finance the transaction.
- Disclosure letter: The purpose of a disclosure letter is to identify and make known to the buyer any exceptions to the warranties that are given by the seller in the SPA or APA. The disclosure letter serves both parties’ interests. For the seller, it may provide a defence to a breach of warranty claim. For the buyer, it supplements the due diligence exercise in providing a complete picture of the target company’s business and its liabilities.
It used to be the case that the parties would all convene in one place (traditionally at the buyer’s solicitors) to execute all of the transaction documents together. However, with the advancement of digital signature technology, most transactions are now completed remotely.
