What legal documentation is needed for the purchase of a business?

As the due diligence process progresses when buying a business, the parties will begin negotiation of the material supporting legal documentation. The range of legal documentation required varies for each deal.

Acquisition agreement

A key document is the acquisition agreement, which is traditionally prepared by the buyer’s lawyers. A typical acquisition agreement (share purchase agreements and asset purchase agreements) will be between forty and a hundred pages, depending upon the complexity of the deal, 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

The other key document in a transaction is the disclosure letter. The sellers will work with their solicitors 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 will arise if the facts which give rise to the breach were disclosed. The disclosure letter is therefore a key transaction document to protect the seller from a claim for breach of warranty.

The disclosure letter will typically be reviewed and heavily negotiated by the buyer’s solicitors before reaching its final form.

Ancillary documents

Although the acquisition agreement and disclosure letter are the key documents involved in the purchase of a business, there will also be a suite of ancillary documents supporting the acquisition. These are traditionally prepared by the buyer’s solicitors. The ancillary documents 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 need to be prepared. For example, our Employment colleagues may draft 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.

The drafting, provision of advice and negotiation of the full suite of documents necessary for the transaction will be project managed by the Corporate & Commercial team to ensure a smooth transaction up until completion. If you have any questions about buying a business then please get in touch.