Selling a Privately Owned Business – Briefing 15 – Legal Completion
the deal has been agreed, the Heads of Terms has been signed and due diligence
is underway. You’re in the completion
phase of the sale!
solicitors will now be drafting the legal documentation which governs the sale,
the fundamental document being the legally binding Sale & Purchase
are ten pointers to assist in guiding you through the completion phase of your
- The SPA fully
defines the structure and terms of the deal.
The main purpose of this document is to protect each party against
unforeseen events occurring after sale completion, and to define the
consequences of any such occurrences.
- The SPA will be
driven mainly by the buyer, who is taking the risk in purchasing the
business. The buyer will include in the
SPA clauses referred to as warranties, which are declarations of fact given by
you as seller about the business. The SPA defines the protection given to the
buyer if any such warranty is subsequently breached by being found to be
incorrect or untrue. Warranties are
always the most heavily negotiated aspects of the SPA.
- The SPA will also
include indemnity clauses. These provide guaranteed protection for the buyer
against a specific liability. Typically
indemnities involve a payment by the seller to the buyer to compensate for
losses caused by breaches in an agreed provision. Generally any payments under an indemnity
clause will be made on a “£ for £” basis.
- A key aspect of
the legal completion process is “disclosure”.
This is a process whereby you as seller make known to the buyer any
appropriate matters about the business, which, being declared during due
diligence, are then excluded from the warranties. These disclosures are usually collated into a
formal “disclosure letter” supported by appropriate documents. One effect of disclosure is that you as
seller are able to discuss any matters arising directly with the buyer, which
you can then address together as appropriate before completion.
- Other key clauses
in the SPA are known as “exclusion provisions”.
These collectively outline the basis on which you, as seller, will
transfer the business to the buyer.
These will include how the consideration for the business will be paid,
including any deferred consideration, earn outs and the basis on which price
adjustments may take place.
- Finally, there are
other types of clause, referred to as “covenants”. Covenants regulate the actions of both buyer
and seller, including agreements to take (or not to take) certain actions. Covenants also form the basis for closing
conditions and termination provisions.
- The SPA is not
only about the buyer. It will also give you, as seller, protection against
future unreasonable claims by the buyer.
It is essential that these clauses are drafted carefully, as effectively
when you sell, you will be “swapping” the limited liability of your company for
personal liability under the SPA.
- There will also be
another document, concurrent with (or sometimes an addendum to) the SPA, which
is the Tax Deed. When acquiring a company, the
buyer will inherit the tax liabilities of that company. The tax deed protects
the buyer, as you as seller effectively promise to pay the buyer an amount
equal to any pre-completion tax liabilities. One purpose
of the Tax Deed is to allow the buyer to recover any such tax liabilities
without having to prove fault.
- Depending on the
size and complexity of the sale, there may be other documents running alongside
the SPA. For example, in almost all
cases there will be a Service Contract, which is a formal contract defining the
basis on which you as seller will work with the buyer during a handover period
during post sale.
- When the
completion phase is coming to an end, and the SPA and attendant documents have
been prepared and agreed, a date will be set for formal completion. This may involve an actual meeting between
all parties, or increasingly commonly now, this is done remotely, with each
party attending at their respective solicitor’s offices, with completion taking
place electronically. Either way there
will be a number of ancillary but important practical documents to sign, for
example director’s resignations, the actual share transfer forms, and board
This final completion
phase is vitally important to you as seller, and you should always be advised
by specialist M&A solicitors.
However amicable the deal with the buyer may be, your interests should
always be fully and properly protected in the event that something unforeseen
goes wrong at some point after sale. A weak SPA can cause significant problems
at any future date should things not go as expected. Expect the unexpected!
12 December 2019