Why would a company wish to buy-back its shares?
The key reasons for a company to buy back its own shares are to:
A share buyback must be carried out in strict accordance with Part 18 of the Companies Act 2006. A buyback that is not carried out in accordance with this legislation is unlawful and the transaction is void and may be set aside. We, in conjunction with your accountants, can advise you in relation to the structure and the preparation of the necessary documents to effect an own share purchase.
What is the difference between an asset sale and share sale of a company?
There are essentially two ways to buy a business: either by purchasing specified assets of the business or by purchasing the company which runs the business, the latter is achieved by buying the share capital of the company. There are many reasons why one route or another is preferred in a particular transaction and we can advise you on this. Of particular deliberation for a buyer is that under a share purchase the buyer would inherit all the potential liabilities of the company and in an asset transfer they would only inherit the liabilities they choose to take on.
Considerations before accepting investment in your business
Introducing an investor into your business will usually have some effect on the balance of power within the company since most investors will, in exchange for their investment, seek to gain some form of equity return. This may be an allocation of shares in the company which carry voting rights diluting the existing voting power and/or rights to dividends. If you are thinking of taking on an investor, you need to carefully consider how the company will operate in the future and what protections might be reasonable for you and/or the new investor at both board and shareholder level. The preparation of an Investment Agreement and new Articles of Association is nearly always required and we can advise on this.
What are the key protections in relation to a share purchase/asset purchase?
Due Diligence: Due diligence is the process by which a thorough investigation into the business is carried out before a buyer commits to purchase. This includes enquiries about the financial status of the business, the customers, the employees and the contractual relationships of the business. This is usually carried out by the buyer’s solicitor and accountant but can be carried out by the buyer himself.
Warranties: Warranties are contractual statements of fact contained in the purchase agreement which take the form of assurances from the seller as to the state and condition of the company or business and, in particular, any existing liabilities. If a warranty proves to be untrue the seller will be in breach and the buyer may be able to claim damages for the loss he suffers as a result of the breach. It is always preferable for a buyer to know of a problem in advance, as he then has the opportunity to walk away, argue for a price adjustment or seek specific contractual protection, rather than to have to sue for breach of warranty at a later stage.
Indemnities: An indemnity is a promise by the seller to reimburse the buyer in respect of a particular type of liability, should it arise. The purpose of an indemnity is to provide a guaranteed remedy (on a pound-for-pound basis) for the buyer where a breach of warranty may not give rise to a claim in damages, or to provide a specific remedy which might not otherwise be available at law.
Disclosure: Disclosure is the process of the seller making general and specific disclosures against the warranties contained in the purchase agreement. If the seller fails to disclose a relevant matter, in respect of the warranties, he may be sued by the buyer for breach of warranty. The seller usually makes his disclosures in a disclosure letter and attaches relevant documents to that letter to support its disclosures.
Restrictive Covenants: these take the form of a series of negative covenants that restrict the way in which the seller can act following the sale of the business, for example, restricting the seller from setting up a competing business or having dealings with the customers and suppliers of the business and poaching employees. In sale agreements these covenants tend to be longer than those found in employment contracts as the seller has received valuable consideration, in the form of the purchase price, for agreeing to enter into these restrictions.
Do the employees have to be transferred to the purchasing company?
Generally under the Transfer of Undertakings (Protection of Employment) Regulations (known as ‘TUPE’) if a business is sold to a new owner the employees follow the business and are transferred to the purchasing company. They are transferred on similar terms to their current employment and at the least under no worse terms. TUPE usually only applies on the sale of business and assets as upon a share sale the owner of the business (i.e. the company remains the same) however this is not always the case and we can advise you more specifically to the impact of TUPE on the transaction.
What is an “earn-out” and when is it appropriate?
An "earn-out" is a mechanism by which a seller can achieve additional consideration for the sale of his business by reference to and as determined by the performance of the business over an agreed trading period following the sale.
A sale involving an earn-out will typically involve an initial payment on completion of the sale, followed by further deferred payments over a number of years. The earn out payments are normally calculated and paid as a percentage of annual turnover or profits.
Earn-outs are often used as a management incentive where owner-managed businesses are sold and the managers continue to work for the business following the sale. They are also commonly used where the business being bought is fairly new but has significant growth potential and in circumstances where the seller wishes to achieve the price the seller would sell for.
Get expert legal advice from one of Sheffield’s most respected law firms, Wake Smith Solicitors.
Our team of friendly, professional solicitors in Sheffield can provide support and advice in a wide range of areas for you and your business. Call our Sheffield Solicitors on 0114 266 6660 or fill out the simple form below and we will get back to you as soon as possible.
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