Shareholders’ Agreements
Agreements between shareholders (members) can be used to achieve the balance of power among the parties, provide solutions to disagreements, set out funding requirements and offer protections upon exit or dissolution
Share purchase agreements (SPAs) and asset purchase agreements are the two well-known tools in mergers and acquisitions.
There are other options for M&A transaction, of course: some jurisdictions permit for two (or more) companies to merge directly and some rely on related mechanisms to the same end (eg, schemes of arrangement in England).
Traditionally, the starting point has been to say that in a share acquisition, the purchaser “acquires” the company as a whole, including its liabilities – and, therefore, the transaction should be carefully negotiated; whilst in an asset acquisition the vendor disposes of, and purchaser acquires, just the asset, – surely a simpler case.
However, in practice share acquisitions and asset purchases may have more in common than expected. For example, a “sale” of a mining concession could require governmental consents and be subject to the condition that the purchaser assumes certain liabilities. Just as a sale of shares could trigger a change of control clause in financing facilities of the target so an asset sale may trigger a no disposal undertaking: the effect would then be quite similar. There are also statutory controls that aim to ensure that various stakeholder burdens follow the assets, such as regulations on transfer of undertakings – protection of employment, and various pension and environmental rules.
An interesting question to consider is appropriate governing law for an acquisition. Trivial thing to say, some assets, such as land, must be acquired / sold under the lex situ. But with reference to shares, the choice might be more involving: will the purchaser aim to claim against the vendor or will the purchaser aim to enforce against the shares of the target should the completion not occur? Are there any mandatory requirements in the jurisdiction of the target company? Depending on the answers, the parties might be best advised to select one or the other governing law.
In cross-border transactions, SPAs typically follow models with standardised content, including the all-important warranties and indemnities sections. The negotiation will then often focus on exclusions and limitations. Of course, depending on the circumstances, other important item might be pre-closing conduct, any necessary approvals, adjustments, and earn-out provisions.
An SPA will often be preceded by a due diligence exercise investigating various aspects of the target business. Whilst due diligence merits its own dedicated coverage, we should note here the importance of allocating a sufficient time. Both for each of the vendor and the buyer, lack of time to prepare for, or complete, due diligence, as the case may be, could result in an SPA that offers insufficient protection to either party.
Should any party request a warranty and indemnity insurance, more time must be allocated so that the underwriters are also able to study the circumstances. And additional time could also be spent on negotiating the policy.
