Selling a company is a complex process that involves numerous legal considerations and steps to ensure both compliance with UK laws and regulations, and adequate protections for both the buyer and seller. The legal process is designed to protect both parties and ensure that all aspects of the transaction are conducted fairly and transparently.
In this article we discuss the legal process involved in a company sale, outlining each key stage and the associated legal requirements.
1. Initial Preparation and Legal Documentation
The legal process often begins simply with preparation and the gathering of all necessary documentation. This stage involves:
- Engaging Legal Advisors: The first step for a seller is to engage a solicitor with expertise in mergers and acquisitions (M&A) or business sales. Legal advisors play a crucial role in guiding the seller through the complexities of the sale process and ensuring compliance with legal requirements. A transactional team that understands the business and your drivers, and can act as trusted advisors to the process, is key.
- Pre-Sale Due Diligence: The seller may opt to conduct an internal pre-sale due diligence process to identify matters that could affect the sale. This may include a review of the company's legal structure (including its shareholding and articles of association), key contracts (such as employment agreements, supplier contracts, customer agreements), and intellectual property rights. This pre-emptive due diligence will help to identify any legal issues that need to be addressed before the sale.
2. Drafting a Non-Disclosure Agreement (NDA)
Before sharing sensitive information about the company with potential buyers, it is crucial to protect that information. The seller’s solicitor will draft a Non-Disclosure Agreement (NDA) to protect confidential information about the business. An NDA legally binds potential buyers to confidentiality, preventing them from disclosing or using sensitive information about the company for any purpose other than evaluating the business for a potential purchase. All interested parties must sign the NDA before they receive detailed information about the company, such as financial statements, customer lists, and intellectual property details.
3. Heads of Terms (Letter of Intent)
Once a potential buyer is interested and the NDA is in place, the next step is to outline the key terms of the proposed sale.
The Heads of Terms, also known as a Letter of Intent (LOI), is a non-binding document that outlines the main terms of the proposed sale, such as the purchase price, payment terms, and any conditions to the sale. It serves as a basis for the detailed negotiations that will follow. The buyer and seller negotiate the Heads of Terms to ensure both parties agree on the fundamental aspects of the sale. Although the document is generally not legally binding (except for certain clauses like exclusivity and confidentiality), it reflects a mutual understanding and commitment to proceed with the sale under the outlined terms.
Once the LOI has been agreed and signed by both parties, the transaction process itself can commence. This usually begins with a thorough investigation of the company and the business by the buyer, a process known as due diligence.
4. Due Diligence
The formal due diligence process is a critical legal step that allows the buyer to investigate the company in detail:
- Financial Due Diligence: The buyer’s legal and financial advisors will review the company’s financial records, including balance sheets, profit and loss statements, cash flow statements, and tax returns. This process helps the buyer verify the financial health and performance of the company.
- Legal Due Diligence: The buyer’s solicitors will examine the company’s legal documents, including contracts, employment agreements, customer contracts, supplier agreements, intellectual property rights, litigation history, and regulatory compliance. This stage is crucial for identifying any potential legal risks or liabilities that could affect the value of the business or impede the sale.
5. Core Legal Documents
Once due diligence is nearing conclusion the buyer’s solicitors will begin to produce the core transaction document that governs the deal: the Share Purchase Agreement (SPA). The SPA is the central legal document in the sale of a company. This document outlines all the terms and conditions of the sale, including the purchase price and payment terms. It includes assurances about the company to be provided by the seller, known as warranties and indemnities, and usually also includes undertakings again provided by the seller to limit their competitive activities following the sale. The seller’s solicitors will review the SPA and negotiate any terms that may be unfavourable to the seller. This negotiation process can involve several rounds of revisions to ensure that the final agreement protects the interests of both parties.
6. Other documents
Once both parties are nearing agreement on the terms of the SPA, any ancillary agreements, such as transitional service agreements, consultancy agreements, or non-compete agreements, may also be drafted and negotiated. This also includes undertaking the disclosure process. In response to the assurances provided in the SPA, the seller is able to make formal disclosures to the buyer to confirm the basis upon which the buyer is acquiring the company in a document known as the disclosure letter. These disclosures detail issues or potential risks for the buyer and limit the liability of the seller in respect of the same. As with the SPA, the seller’s solicitors will assist in drawing together the disclosures, both generally and in relation to specific items, to ensure transparency for the buyer and protection for the seller.
7. Signing and Completion
The signing and completion of the sale is the final step in the legal process:
- Signing the SPA: Both parties sign the SPA and any ancillary documents. The signing of the SPA makes the agreement legally binding, subject to any conditions precedent outlined in the document.
- Completion Meeting: A completion meeting is typically held where the transaction is finalised. At this meeting, the following occurs:
- The buyer transfers the purchase price to the seller.
- Legal ownership of the company’s shares is transferred to the buyer.
- All necessary documents, such as share transfer forms, board resolutions, and updated statutory books, are signed and exchanged.
- Post-Completion Filings: Following the completion of the sale, certain filings must be made with Companies House and HMRC, including the payment of Stamp Duty on the transfer of shares and notifying Companies House of any changes to the company’s officers or registered office. The buyer’s solicitors usually handle these filings to ensure compliance with legal requirements.
8. Post-Sale Considerations
After the sale is completed, there may be additional legal considerations:
- Transitional Arrangements: If agreed between the parties, the seller may stay on as a consultant or advisor for a transitional period to assist the new owner in taking over the business. Any such arrangements will be outlined in a consultancy or transitional service agreement.
- Restrictive Covenants: The SPA may include restrictive covenants that prevent the seller from competing with the business for a specified period or from soliciting employees or customers of the company.
- Tax Considerations: The seller must address any tax implications arising from the sale, including capital gains tax. It is advisable to consult with a tax advisor to ensure compliance with all tax obligations and to explore any potential tax reliefs or planning opportunities.
The legal process for selling a company involves several intricate steps, each requiring careful attention to detail and compliance with legal requirements. Engaging experienced legal advisors is crucial to navigate this complex process, protect the interests of both parties, and ensure a smooth and successful transaction. By understanding each stage of the legal process, sellers can better prepare for the challenges ahead and achieve a successful sale of their company.
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The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
