A company’s business can be acquired by buying the shares in the company that owns the business (share sale) or by buying the assets which comprise the business (asset sale). In acquiring the shares or the assets of a company, the buyer will need to obtain sufficient information to understand any liabilities or risk that come with it. The general principle of ‘buyer beware’ places the responsibility on the buyer to ensure that it investigates the target business thoroughly before making the acquisition. The investigation of the target’s business is often called due diligence. Due diligence primarily covers the financial and legal aspects of a company.
In due diligence the buyer’s primary aim will be to assess the true value of the target business or its assets and to unearth any risks involved in buying the target business. The buyer will want to know how the risks can be mitigated through warranties (assurances about the quality of the target business), indemnities (agreement to reimburse for liability in respect of an identified risk) or other mechanisms.
In anticipation of a sale, the seller may also commission a due diligence on the target business itself. The purpose of this will be to enable the seller to assess the true value of its business and assets. It will also aid the seller in making disclosures (confessions) to qualify the correctness of the assurances that the buyer wants regarding the target business. The seller will also identify how some of the warranties and indemnities can be limited, for example by setting out the maximum amount that can be claimed or by having a time limit on when claims can be brought by the buyer.
The due diligence will therefore cover anything from a review of the target business’ corporate documents, its employees, contracts, property, claims by third parties, financing arrangements, tax, to an assessment of the financial books and trading performance of the target business.
To facilitate the due diligence exercise, the buyer and seller will often agree to keep the information shared between them confidential. This may be achieved by having a confidentiality or non-disclosure agreement between the parties.
Following due diligence, the buyer and seller will then negotiate the agreement for sale and purchase of the business. In this agreement, the buyer and seller will set out the agreed purchase price and other terms negotiated between them. Whenever possible, the signing of the agreement will be concluded simultaneously with the payment of the purchase price. However, certain conditions may need to be fulfilled or third party consents obtained before the transfer of the share or assets and payment of the purchase price. These conditions are often called conditions precedent.
The most common conditions precedent include approval by the regulatory authorities in the country or countries in which the business operates, the notification of third parties or the resolution of certain business conditions (usually uncovered in the due diligence) that the buyer is unhappy about. In such cases, the agreement will also have promises by the buyer to ensure that it continues to operate the business in the ordinary course to ensure that its value is not degraded between the time the agreement is signed and when the buyer pays for it.
The agreement for sale and purchase will also contain the assurances and indemnities that the buyer wants regarding the target business. As noted above, these assurance and indemnities will be qualified by any confessions made by the buyer about the business and by agreed limits as to compensation for any liability arising from the sale of the target business.
The conclusion of the sale and purchase agreement (often called completion) in accordance with its terms will see the buyer pay the purchase price against receipt of the ancillary documents (such as transfer forms or title over property) necessary to transfer the shares or the assets from the seller to the buyer. Using the ancillary documents, the seller will attend to housekeeping matters such as payment of stamp duty and filing of returns at the relevant registry. A buyer may also need to remit capital gains tax on the gains realised from the sale if payable in that country.