Selling your business – Understanding the main transaction documents

As the due diligence process progresses, the parties will begin negotiating the suite of legal transaction documents. The legal documents required varies depending on the nature and structure of the deal. However, they can be broadly split into 3 categories as examined below.

Acquisition agreement

The key document for any deal is the ‘acquisition agreement’, which is traditionally prepared by the buyer’s lawyers.

A typical acquisition agreement (i.e. share purchase agreement and asset purchase agreement) will be between forty and a hundred pages and will be the most heavily negotiated document.

An acquisition agreement will typically set out:

• What is to be sold
• Details and terms of the purchase price
• Conditions to be fulfilled (if any)
• Completion requirements
• Warranties and indemnities
• Seller limitations on claims
• Restrictive covenants
• Pension arrangements (if applicable)
• The terms of any ongoing relationships between the parties.

When a business is sold via a sale of shares, a key consideration for both parties when structuring the transaction will be the treatment of tax. A buyer will require protection against potential tax liabilities, and such protection usually takes the form of a tax covenant and tax warranties in the acquisition agreement.

The tax covenant is relevant only when shares are being acquired; on an asset purchase, the buyer will not be taking on the tax liabilities of the selling entity.

Disclosure letter

Whilst the acquisition agreement is traditionally prepared by the buyer’s solicitors, the seller will work with their lawyers to prepare a disclosure letter that contains both general and specific disclosures against the warranties contained in the acquisition agreement.

If a warranty turns out to be untrue, the buyer has a claim for breach of contract, however, no claim can arise if the facts which give rise to the breach were disclosed (and the disclosure meets the legal test for ‘fair disclosure’. The disclosure letter is therefore a key transaction document to protect the seller from a claim for breach of warranty.

Ancillary documents

Although the acquisition agreement and disclosure letter are the key documents involved in the sale of a business, there will also be a suite of ancillary documents supporting the sale.

These are also usually prepared by the buyer’s solicitors, and will need to be reviewed, negotiated (where necessary) and agreed by the seller and their lawyers. The Corporate & Commercial team will take the lead in reviewing most ancillary documents, which may include:

• Board minutes approving the transaction (of the buyer, target company and a corporate seller)
• Director resignation letters
• Lost share certificate indemnities/stock transfer forms/share certificates (for a transaction involving shares)
• Powers of attorney
• Deeds of assignment for intellectual property
• Novations of key commercial contracts
• Companies House forms.

Depending upon the deal, other ancillary documents of the transaction may be dealt with by other teams. For example, our Employment colleagues may review, advise on and negotiate:

• Employment and pension transfers as part of an asset sale
• Consultancy agreements
• Settlement agreements with exiting employees
• New employment contracts.

Similarly, our Real Estate team may deal with transfers of properties or assignments of leases or licences. Depending on the nature of the deal, it is sometimes necessary to involve lawyers from our Banking & Finance, Tax and Regulatory teams.

In order to ensure a smooth transaction process, our approach is to put together a transaction ‘Project Team’ at the outset of any deal, to ensure that the client is always supported at the right level by a multi-specialist team of lawyers.

If you have any questions about the topics raised in this article, please get in touch.