Chapter 20 Company Law: sales of shares and assets Flashcards
20.1 Introduction
A company is an artificial person. The shareholders do not own the assets of the company, the shareholders own a single asset, their shares. If the company has a single shareholder, they have two options to sell the company:
• They can sell their share; the purchaser of the share becomes the new shareholder and sole owner of the company. This is a share sale
• The company itself sells the individual asset it owns to the purchaser. The original shareholder still owns the company, which has no assets. The purchaser can use either a separate company to buy the individual assets or can buy them themselves as a sole trader. This is an asset sale.
20.2 A share sale
A share sale involves the sale of one asset, the shares. A sale of shares will generate a capital gain for the shareholder. Tax is a consideration for both the vendor and the purchaser as the consequences of a share sale differ to an asset sale.
From a legal perspective, a sale of shares is affected by the vendor and purchaser making and completing a contract of sale. To complete the contract the purchaser’s name must be entered into the company share register and that of the vendor removed. As the purchaser is buying the entire company, they will check the company has the correct legal title to the assets and they are not taking on any liabilities hidden in the company. The purchaser might want to protect the goodwill of the business by entering into a contract with the vendor containing appropriate restrictive covenants. The purchaser will carry out due diligence, this will involve the purchaser carrying out tasks including:
• Sending a list of standard pre-contract enquiries to the vendor
• Asking its accountant to prepare a report which includes assets/liabilities to be acquired, suppliers and customers, taxation information and its general profitability
• Making enquiries of third parties such as Companies House
The purchaser has options in respect to the terms of the agreement they enter into with the vendor:
• They can obtain a warranty from the vendor that they do not have any liabilities other than the ones disclosed. The purchaser needs to assess the effectiveness of the warranty as they may need to go to court to enforce it.
• They can seek specific indemnities from the vendor. They are a promise by the vendor to make payments to the company or purchaser if certain liabilities arise. Unlike a warranty loss does not have to be proven
Common warranties include:
• An accounts warranty – that the accounts show a fair view of the business
• The precise nature of the assets and liabilities of the business
• Tax warranties – can cover VAT, PAYE, NIC
• General warranties
• Disclosure warranties – where the vendor discloses to the purchaser before sale, knowledge of any claims likely to breach any of the warranties. Disclosures are made in a disclosure letter
The purchaser needs to consider the position of company employees, whose contracts are unchanged by the sale. They will need to acquire after staff contracts. If they wish to reduce the workforce, a decision is made whether the vendor makes staff redundant before the sale or whether the purchaser does it after the sale. If made after the sale, the purchaser could agree about splitting the costs of redundancy.
20.3 An asset sale
The shareholder does not dispose of anything in this case, the company disposes of everything it owns. The company is the vendor in this case. The purchaser still carries out the same due diligence and is a share sale and check the company has title to the asset it is selling (by checking the land registry for title to land etc). the purchaser will want to check the condition of assets and check if they are owned or held by a hire purchase or under a lease.
Stock, debtors, goodwill and other intellectual property that are being sold ill need to be valued and it will need to be ascertained whether any intellectual property is protected through registration.
Where the company’s employees are transferred as a going concern, the TUPE regulations apply. The contracts of service automatically transfer to the new owner and the continuity of employment is preserved.
20.4 Heads of agreement and the sale of agreement
Before the vendor accepts the purchaser’s offer, the parties usually draw up a document known as a heads of agreement, setting out the terms of the deal and identify any commercial issues. They are not compulsory and not legally binding but are issued subject to contract. Certain terms in the document may be agreed upon as being legally binding, such as:
• Confidentiality – purchaser agrees not to disclose any information provided
• Exclusivity period – the vendor agrees not to negotiate with other parties for a specified period
• Costs – they can be reimbursed if the deal does not go ahead
The sale agreement is likely to include warranties and indemnities and restrictive covenants. The agreement may be conditional on certain events occurring. It also provides for limitations to and exclusions from the warranties and indemnities and the vendor is likely to provide a disclosure letter.
The contract is likely to include clauses providing for a limit on the vendor’s liability, a limitation of time within which clauses can be brought (often one – three years from general warranties and six to seven for tax matters), a prohibition against claims below a certain amount and an exclusion of claims provided for in the accounts.
