In the final instalment of our series of articles on mergers and acquisitions, Buckles’ Company Commercial lawyer, Tom Birkett, examines issues around share purchases.
Acquisitions involve an entity applying its resources to obtain ownership, or control, of certain components of another entity. Compared to merger transactions, acquisitions involve a more formal transfer of control and, unlike a merged company, significant resources generally leave the target entity as a result of the transaction. An acquisition can take the form of an asset purchase or, if the target is a company with share capital, a share purchase.
Advantages
The main advantage that a share purchase has over an asset purchase is its relative simplicity. Asset purchases can be very complex, and carry a comparatively higher risk of delays and increased transaction costs. Conversely, share purchases generally only require one transfer document, are less likely to require third party consent, and carry less risk of assets being inadvertently transferred.
Unlike asset purchases, the buyer and seller in a share sale are not subject to the requirements of the TUPE (Transfer of Undertakings (Protection of Employment)) Regulations 2006 to inform and consult with the employees of the selling entity.
Share purchases also provide the seller with a clean break. An individual shareholder who sells their shares in the target business is essentially delivered a clean break from the business and its liabilities. When a share transfer completes, the liability of the exiting shareholder is generally limited to any warranties, indemnities, and covenants which they agree to within the share purchase agreement.
Unlike the position under an asset purchase, the proceeds of a share sale are paid directly to the target company’s shareholders. This limits a potential distribution block arising from capital maintenance rules, and also avoids the double tax charge which can arise in an asset purchase when sale proceeds are distributed from a corporate seller.
Disadvantages
A disadvantage of share purchases is the attendant need for shareholder approval. In seeking to take over a target business via a share purchase, a buyer will ordinarily seek to acquire 100% of the issued share capital of the target company. Consequently, the buyer will generally need all of the target’s shareholders to sell their shares. Accordingly, if a shareholder is untraceable, or unwilling to participate, the transaction might not proceed unless: –
- Firstly, the company’s articles (or a shareholders’ agreement) include(s) a contractual mechanism to force the unwilling/missing shareholder to participate; and,
- Secondly, the requisite majority of shareholders approve the transaction in question.
The buyer in a share purchase may be frustrated by the inflexibility of terms. Whilst the buyer and seller in an asset purchase can choose which assets and liabilities are to be transferred, the target business within a share purchase is acquired “warts and all”. To mitigate the risk posed by extensive or unknown liabilities within the target company, the buyer in a share sale can try to negotiate a price reduction, and could even request that the seller provides increased warranties and indemnities within the share purchase agreement. However, the buyer may find it expensive and inconvenient to enforce a warranty claim, and, if the seller does not have sufficient resources, the claim may prove to be of no value. As such, the flexible approach available within an asset purchase may be preferable for a buyer.
Depending upon the specifics of the share purchase, the parties may need to consider the prohibition on financial assistance within the Companies Act 2006. In particular, if the target group includes a UK public company, the parties will need to assess the structure of the transaction, and especially the source(s) of any funding. Furthermore, unlike asset purchases, share purchases are all subject to the financial promotions regime set out within the Financial Services and Markets Act 2000.
Share purchases are subject to the UK merger control regime. The merger control system applies to anything deemed to constitute a ‘relevant merger situation’ under the relevant legislation. More specifically, the regime focuses on changes in ‘material influence’ within a company, and a key factor in identifying ‘material influence’ within a transaction is the scale of the acquirer’s shareholding.
There is no specific level of shareholding which gives rise to a presumption of material influence. Typically, a shareholding of over 25% will be presumed to amount to material influence, however, depending upon other factors, such as board representation, a shareholding of 15% or less could potentially be deemed to amount to material influence.
Conclusion
In looking to grow or change the ownership of a business, those involved need to be clear on their objectives. Once these objectives have been clarified, and those affected are clear on the facts involved, they need to consider how they might best be able to achieve their aims, including via the options outlined above.
This is not legal advice; it is intended to provide information of general interest about current legal issues.
