Completion

Question 1

What happens after the transaction docs have been negotiated and finalised?

Answer 1

• Once the transactional documents have been negotiated and finalised, then the next step is for the parties to sign and date the acquisition agreement (and usually the disclosure letter). This is the point at which the parties formally agree to enter into the transaction through the method of signing. At signing the parties are legally bound to proceed with the deal provided the conditions for completion are fulfilled.

Question 2

What is completion?

Answer 2

• The transaction is then concluded by a process called completion. This process usually takes place at a formal meeting attended by all the parties and their legal advisors (although increasingly this process is being dealt with remotely). Completion is when all the necessary formalities to close the transaction take place, such as the seller(s) signing the stock transfer form(s) and the buyer paying the purchase price.

Question 3

Are signing and completion carried out at the same time?

Answer 3

• Signing and completion is often carried out at the same time, although sometimes a delay between the two stages may be necessary for legal or practical reasons. This is referred to as a ‘split’ signing and completion.

Question 4

• Advantages of a simultaneous signing and completion

Answer 4

• A simultaneous signing and completion provides certainty and eliminates the risk of an adverse event occurring between signing and completion.
• The drafting of the acquisition agreement will be relatively straightforward as there is no need for the parties to agree and document the allocation of risk in the period between signing and completion.
• However, it may not always be possible for signing and completion to take place at the same time. For example, completion may be conditional upon certain conditions being satisfied such as regulatory or shareholder consents. In these circumstances, the parties have two options, which we will now examine.

Question 5

• The parties’ options when completion is subject to conditions

Answer 5

• The parties can delay signing until all the completion conditions have been met. This means signing and completion can take place simultaneously. It also reduces the need for the parties to agree and document what will happen in the intervening period.
• However, this can also lead to uncertainty as the parties are not committed to proceeding with the transaction until all the requirements have been met.
• The parties may decide to proceed to signing and to document the requirements for completion as conditions precedent to completion in the acquisition agreement. Both parties are then committed to proceeding with the transaction if the conditions precedent are fulfilled. Although this means that the parties can be certain completion will occur on satisfaction of the conditions, it also means the parties will have to reach an agreement on a number of complex issues such as:
  · How the business will be managed in the intervening period; and
  · What will happen if the conditions are not satisfied within the time limits.

Question 6

• Where the parties have opted to proceed with a ‘split’ signing and completion, there will be an added layer of complexity both from a commercial and legal point of view. The parties will have to agree and document several key issues in the acquisition agreement including:

Answer 6

· The extent of the conditions precedent and the timescales;
· Who is responsible for ensuring satisfaction of the conditions precedent;
· What happens if the conditions precedent are not satisfied;
· How the target’s business should be run in the period between signing and completion;
· Who should bear the risk of any adverse event(s) that may occur between signing and completion; and
· Whether the seller will give the warranties in the acquisition agreement at signing only or whether these will be repeated at completion.

Question 7

• The buyer’s position where there is a split signing and completion

Answer 7

• The buyer’s solicitors will have to consider what events might occur to the target in the interim period between signing and completion which could mean that the buyer is no longer buying what it thought it was buying when it signed the acquisition agreement.
• Once the acquisition agreement has been signed, the buyer will be committed to the purchase so it will not want the value of the target to be reduced or its business or reputation to be damaged in any way during the period leading up to the date of completion.
• The buyer is also likely to want to be able to terminate the acquisition agreement and pull out of the transaction altogether, if anything does occur before completion which might materially and adversely affect the value of the target. As the buyer has little control over the target until completion, the buyer’s solicitors will want to negotiate the appropriate protections in the acquisition agreement.

Question 8

• The buyer will want to negotiate three main provisions in the acquisition agreement to protect its position in the event of a split signing and completion as follows:

Answer 8

· Dealing with any conditions precedent to completion
· Agreeing how the target should be run in the interim
· Ensuring the warranties are still true on completion

Question 9

• There will have been a reason why simultaneous signing and completion has not been possible. The acquisition agreement will need to include a clause dealing with

Answer 9

· the conditions precedent to completion;
· setting out what the conditions precedent are;
· setting a final date by which they must be satisfied; and
· setting out which party is responsible for satisfying the conditions precedent and where appropriate, mutual obligations on the part of the buyer and the seller to co-operate in order to do all things that may be necessary in order to ensure that the conditions precedent are satisfied.
* This clause should also state what will happen if the conditions precedent are not satisfied by the given date. Usually, one or both of the parties will have a right to terminate the acquisition agreement by giving written notice of termination to the other and if that is done, the clause will go on to provide for certain key provisions in the acquisition agreement to survive termination.

Question 10

• The acquisition agreement will need to include provisions relating to the conduct of the business of the target between the date of the acquisition agreement and completion. The target may be prohibited from taking certain actions in the interim period without the consent of the buyer. These restrictions may relate to the following activities:

Answer 10

· capital expenditure;
· the disposal of material assets;
· additional borrowing;
· hiring and firing of key employees;
· entry into new material contracts;
· changing existing or terminating material contracts;
· issuing of new shares or options to acquire shares;
· changes in the constitution of any of the companies in the target group; and
· the declaration of dividends or other distributions.

Question 11

• The seller may be required to give undertakings to the buyer concerning the conduct of the target’s business in the interim period such as undertakings to:

Answer 11

· procure that the target group conducts its business(es) in the ordinary and usual course;
· use its best/reasonable endeavours to maintain the trade connections of the target group;
· Inform the buyer if there are any material changes to the business or the financial position of the target group; and
· ensure that adequate insurance policies are maintained covering the assets of the target group.
* As with the repetition of warranties a buyer may want to include termination rights in relation to breach by the seller of the pre-completion undertaking but this will be strongly resisted by the seller.

Question 12

• In requesting consents and undertakings in the interim period the buyer is guarding against a loss in the value of the target prior to completion. However, there are a number of reasons it may be appropriate to limit the extent of control the buyer has in the interim period including:

Answer 12

· under certain competition regimes (including the EU) if the buyer is seen to have taken control or the parties have started to implement integration before the appropriate clearance or consent they risk incurring penalties. This is known as ‘gun-jumping’;
· in the UK the CMA has the power to impose an interim enforcement order (‘IEO’ also known as a hold separate order) to prevent pre-emptive actions in certain mergers. Breach of an IEO can result in a fine of up to 5% of turnover;
· the seller and/or target may be subject to regulatory regimes (e.g FCA and SRA regulated businesses and FA regulated football clubs) which impose limits on the control of the buyer; or
· the seller may want to protect the value of the target in the event the transaction does not complete. For example, the seller may want to limit the sharing of confidential information.

Question 13

• The seller will give the warranties and representations at signing when the acquisition agreement is executed. This might cause concern for the buyer, as those warranties and representations may become out of date by the time of completion or, worse, an intervening event may occur which would otherwise put the seller in breach of warranty. Accordingly, the buyer will want:

Answer 13

· the warranties and representations to be given again at completion; and
· the right to rescind if there is any breach of warranty in the interim period.

Question 14

• Getting the seller to repeat the warranties and representations at completion is an example of risk allocation whereby risk is pushed back to the seller. This is because:

Answer 14

· The buyer wants to know that the warranties and representations are still true on completion; and
· The buyer is protected from events occurring between signing and completion which give rise to a breach of warranty.
* In practice it is often only specific categories of ‘fundamental’ warranties that would be repeated on completion, e.g. title and capacity warranties.

Question 15

• Repeating warranties and representations

Answer 15

• The seller may also be obliged in the acquisition agreement to notify the buyer if any of the warranties and/or representations are breached between signing and completion. The buyer’s solicitors should also consider what rights the buyer should have if there is a breach of warranty during the period between signing and completion. Often, the buyer’s solicitors would advise the buyer to seek a contractual right to withdraw from the agreement, if the seller is in breach of any of the warranties before completion, possibly in addition to the right to claim damages for any breach.
• However, whilst it is usual for a buyer to try to negotiate the right to withdraw from the agreement, it is commercially rare to see this right actually exercised because buyers will be very conscious of wasted costs and time already invested in the deal. A more practical approach is that the buyer will seek to revise the purchase price to reflect the impact the breach has on the target. The buyer’s right to withdraw improves its bargaining position in relation to the seller when seeking a reduction in the purchase price.

Question 16

• The seller’s response to the buyer’s requests

Answer 16

• Repetition of warranties/representations
  · If a seller accepts this, it may seek the right to deliver an updated disclosure letter to the buyer on completion in which it can make any disclosures which have arisen during the interim period so that it will not be liable for breach of warranty.
  · A buyer should resist this because if the seller delivers an updated disclosure letter at completion, the seller will not be liable for breach of warranty in respect of the new disclosures which, in turn, restricts the buyer’s remedies in relation to new circumstances over which it has no control.
• Right to withdraw
• A seller will resist a provision giving the buyer the right to withdraw from the deal if there is a breach of warranty. The most a seller will usually accept is a right for the buyer to withdraw if there has been a breach, possibly, restricted to a “material breach” of a warranty leading to a material adverse change in the value of the target group.
• As ever, the final position reached will depend on the respective bargaining power of the parties.
• Material adverse change
• A material adverse change clause relating to general commercial risk, for example a downturn in the market in which the target group operates, gives a buyer a right to terminate the agreement if there is a major change to the business of the target group in the period between signing and completion. The purpose of this clause is to protect the buyer against the general risk of adverse events that may occur between signing and completion.
• A seller will not agree to this unless in a weak bargaining position (on the basis that any general commercial risk should pass to buyer on signing) and if forced to accept the concept, then it should seek to limit the provision to specified events. While material adverse change clauses are not common in the UK market they are more common elsewhere e.g. the USA.
• This is distinct from a breach of warranty leading to a material adverse change in the value of the target after the date of the last audited accounts. Here, the seller may be more inclined to agree to such a provision, or at least may be more willing to enter into negotiations surrounding such a provision, though will usually resist repeating the warranty at closing.

Question 17

• On a share sale transaction, the main documents that are signed and delivered at signing are:

Answer 17

· The acquisition agreement (or share purchase agreement)
* This is the principal document and sets out the terms of the transaction.
· The disclosure letter
* the disclosure letter sets out both general and specific disclosures against the seller’s warranties. The disclosure letter is delivered to the buyer at signing together with the disclosure bundle.
· The tax deed
* As you have learnt the tax warranties and indemnities are usually contained in a schedule to the acquisition agreement. However, these can also be dealt be with in a separate tax deed, in which case it should be executed and delivered at signing.
· Ancillary documents
* Certain other documents may be required at signing depending on the transaction in question. These commonly include:
o Board minutes
 any corporate party to a transaction will need to hold a board meeting to approve the transaction and to authorise a signatory, usually a director to sign the contractual documents on behalf of the company.
o Shareholder resolution
 Sometimes shareholder approval of the transaction will be required. The resolution is often passed by the shareholders prior to signing and a copy of the resolution delivered at signing.
o Legal opinion
 If there are cross border issues because the transaction involves a buyer or seller domiciled or incorporated outside the UK, then a legal opinion will also be required at signing. This will confirm, for example in relation to an overseas seller, that it can sell the shares and give the warranties and indemnities.
o Agreed form documents
 The parties are legally committed to the transaction once the acquisition agreement has been signed and provided the completion conditions are satisfied, they are obliged to complete the transaction. It is important, then that before signing, both parties are satisfied that they can comply with their obligations under the acquisition agreement at completion. In practice this means ensuring that the completion documents are in agreed form when signing happens.
 There are additional considerations where the buyer or seller is a UK listed company. a premium listed company requires shareholder approval for certain transactions, for example a related party transaction or Class 1 transaction. In addition, there may be requirements to make an announcement to an RIS and to send an FCA approved circular to the shareholders.

Question 18

• In order to conclude the transaction, the following events need to happen:

Answer 18

· Each party will provide their signed completion documents
· The buyer will pay the purchase price
· The directors of the target will hold a board meeting to approve the transfer of the shares to the buyer

Question 19

• Completion documents
• In most acquisitions a large volume of documents will need to signed and delivered at completion. The documents will depend on the structure of the deal but usually the following signed documents will be required:

Answer 19

· Stock transfer forms (STFs): to transfer the target shares to the buyer. It is not a requirement that the stock transfer form be executed as a deed.
* The target cannot update the register of members to record the share transfer unless stamp duty has been paid on the transfer. Any stamp duty due must reach HMRC no later than 30 days after the date on which the STFs are signed and dated. The buyer will provide confirmation of payment from HMRC together with the STFs and the old share certificate to the target to be registered as a member and issued a new share certificate. Legal title to the shares only transfers once the register of members is updated.
· Letters of resignation: often the buyer will require the target’s directors to resign from office on completion.
· Power of attorney: the buyer will not become the legal owner of the target shares until the transfer of shares has been registered in the register of members. There is often a delay between completion and registration as stamp duty must be paid. The buyer will therefore require a power of attorney in the interim to control the rights attaching to the shares. (Note that the power of attorney may be included in the acquisition agreement if the acquisition agreement is being executed as a deed).
· Transitional service agreement: this may be required if the target needs access to certain services from the seller following completion or vice versa.
· Escrow account letter: if part of the consideration will be held in escrow.
· Deeds of release/letter of non-crystallisation: the shares or assets of target may be subject to fixed and floating charges to secure loans to the seller. The loans will have to be repaid on completion and the charges released.

Question 20

• In addition to the signed transaction documents, other items that are typically delivered by the parties at completion include:

Answer 20

· Statutory books of target company and any subsidiaries. The seller hands over the target’s statutory books (including its registers of members, registers of directors, registers of allotments and register of persons with significant control (PSC) registers).
· Share certificate(s) for target shares. If any of the certificates are lost or destroyed, the buyer usually accepts an indemnity for lost share certificate instead.
· Minutes of target company’s completion board meeting. The seller delivers signed minutes of the board meeting held by the target company at completion to approve the registration of the transfer of the target shares.
· Copy shareholder resolution(s). This may be relevant when some aspect of the transaction requires approval by one party’s shareholders and, in the case of a split signing and completion, the requisite resolution was not passed at (or before) signing.

Question 21

Completion agenda?

Answer 21

• The buyer’s solicitors will also prepare the completion agenda at the outset of the transaction. This is a very important document for ensuring signing and completion proceed smoothly. Some firms will use a documents list in place of, or in conjunction with a completion agenda but the process is very similar

Question 22

• The completion agenda will generally cover the following matters:

Answer 22

· All the steps that need to take place before completion happens, for example satisfaction of the conditions precedent.
· All the documents that need to be signed and delivered at signing and completion including details of who is required to produce and sign them.
· Other items that must be delivered by the parties at completion, such as the target’s statutory books and the share certificates.

Question 23

• There will be a number of matters that need to be dealt with post-completion including:

Answer 23

· Companies House filings;
· Updating the PSC register at Companies House;
· Submitting stock transfer forms for stamping;
· The buyer’s solicitors complying with their undertaking to transfer the consideration to the seller;
· Updating the target’s company books;
· Make an announcement to an RIS if required by the Listing Rules; and
· Preparing a transaction bible (record of all docs signed in relation to the deal).

Question 24

Your client is proposing to buy the business of a private limited company (the ‘Business’). Your client and the seller of the Business (‘Seller’) have agreed that signing and completion will be split. Your client was the sole bidder for the Business and believes that they are in a strong bargaining position. Your client would like to include a provision that states it is able to terminate the agreement if there is a major change to the Business after signing but before completion.

What is the best advice to give to your client in relation to the likely response of the Seller to your client’s request?

The Seller may refuse the provision as the general commercial risk should pass to your client on exchange.

The Seller may agree to the provision as the general commercial risk should remain with the Seller until completion.

The Seller may agree to the provision but propose that your client is able to terminate only in specified circumstances.

The Seller may agree to the provision as it would be market practice for the Seller to take responsibility for any material diminution in value of the Business between signing and completion.

Answer 24

The Seller may agree to the provision but propose that your client is able to terminate only in specified circumstances.

Correct. Whilst the other options might sound plausible, they are each incorrect. General commercial risk should pass to the buyer on exchange but dependant on the bargaining position of the parties, the seller may not refuse a request for a buyer to terminate the agreement in between signing and completion outright. If a buyer is in a strong bargaining position a seller may well allow a buyer to terminate the agreement in between signing and completion but only in specified circumstances.

Question 25

Your client is proposing to buy the entire issued share capital of a private limited company (‘Target’) from two individuals (the ‘Sellers’). The parties have agreed an acquisition agreement which includes all warranties and indemnities relating to the share purchase. The parties have agreed the following: (i) the transaction will proceed by way of split signing and completion as a result of the share purchase requiring shareholder consent; and (ii) the Sellers will repeat the warranties and unusually be permitted to make additional disclosures on completion.

What signed documents should your client expect to receive from the Sellers on signing of the acquisition agreement?

A signed acquisition agreement and a disclosure letter from the Sellers.

No documents.

A signed acquisition agreement, a disclosure letter from the Sellers and a tax deed.

A signed acquisition agreement, board minutes approving the share purchase, a shareholder resolution and a disclosure letter from the Sellers.

Answer 25

A signed acquisition agreement and a disclosure letter from the Sellers.

Correct. Whilst the other options might sound plausible, they are each incorrect. A signed share purchase agreement will be available at signing as well as a disclosure letter from the Sellers. This is the case even if it has been agreed that the Sellers will also provide a disclosure letter on completion. Board minutes are not required as individuals are not required to produce board minutes. A tax deed is not required as the scenario states that all indemnities and warranties are included in the acquisition agreement.

Question 26

Your client has signed contracts to sell its business (‘Business’) to a buyer. Pursuant to the terms of the acquisition agreement, completion is conditional on consent from a customer who’s contract with your client states that consent is required in the event of a sale of the Business. The parties are currently negotiating the rights of the buyer in the event that the condition isn’t satisfied by the agreed longstop date.

What is the best advice to give to your client in relation to what the buyer is likely or unlikely to request as contractual protection?

The buyer is unlikely to request a right to terminate the agreement as if a longstop date is reached, the buyer is likely to have expended significant time and costs on the transaction, but your client should be prepared for the buyer to ask that the purchase price be revisited.

The buyer is unlikely to request the right to terminate the agreement as it will be concerned that some important provisions within the agreement will be terminated such as the confidentiality clause.

The buyer is unlikely to request any contractual rights as they want the ability to proceed to completion, but your client should be prepared for the buyer to ask that the purchase price be revisited.

The buyer is likely to request the right to terminate the agreement in the event that the condition isn’t satisfied by the longstop date despite the significant time and costs expended by the buyer on the transaction.

Answer 26

The buyer is likely to request the right to terminate the agreement in the event that the condition isn’t satisfied by the longstop date despite the significant time and costs expended by the buyer on the transaction.

Correct. Whilst the other options might sound plausible, they are each incorrect. A buyer will want various contractual provisions to provide it with some bargaining power even if they are unlikely to actually exercise their rights under those contractual provisions. For example having a contractual right to terminate the agreement may give the buyer more bargaining power to agree a reduced purchase price.