How to Buy a Company’s Shares

The most common way to purchase an ongoing business is to acquire all of the outstanding shares of a company. If the company being sold is closely held, the buyer can accomplish this by directly purchasing the shares from each of the seller’s shareholders. The price paid to the seller’s shareholders can be in the form of cash, shares, warrants, debentures, or a mixed bag of some or all.


To a large extent, the process of purchasing a company is the same whether buying a small supermarket or an international chain. The first stage usually involves a high-level review of the seller’s publicly available information. If the buyer feels that it has enough information to make an initial offer for the seller, it will approach the seller’s managing director, or sometimes the controlling shareholder, and make an offer for the shares. If the buyer is interested in the acquisition but feels like it needs more information, it may approach the seller, express an interest, and then ask to receive additional information subject to a confidentiality agreement.


How to approach a seller must be handled with tact and care, especially when it is a competing company or a publicly traded company. If word leaks that any company is “in play”, it could have an adverse effect on its business.


Once the buyer feels like it has sufficient information to value the company it wishes to acquire, its board of directors must pass a resolution authorizing management to make an offer at a specified price per share, or within a specified price range. If a deal can be struck with the seller’s senior management that is approved by its board of directors, or with the holders of a sufficient majority of the seller’s shares, then the two parties can enter into a Letter of Intent for the buyer to purchase the seller’s shares for the agreed upon amount, subject to certain conditions such as the satisfactory completion of a due diligence review and the receipt of necessary shareholder and regulatory approvals.


Once again, the existence of the Letter of Intent and the fact that discussions are taking place should be subject to a strict confidentiality agreement, as premature public discussion of the deal could have a significant impact on both the buyer’s and seller’s business, as it could make employees, suppliers, customers and lenders extremely nervous. Because of the risk and expense involved in moving forward with due diligence and contract negotiations, the Letter of Intent may provide for a break-up fee if one party cancels the deal without cause.


After the Letter of Intent is signed and the confidentiality provisions are in place, the buyer will proceed with a full-fledged financial and legal due diligence review of the seller. If the seller or its shareholders will receive shares, warrants or debentures of the buyer in the transaction, the seller will perform a due diligence review of the buyer as well.


The buyer will send a Due Diligence Request List to the seller that specifies all the documents, financial records and other material it wants to review. The seller will then either deliver the documents or set up locations where they can be reviewed and copied. In addition, the buyer and its advisors will conduct interviews with the seller’s management personnel.


The goal of the buyer’s financial due diligence process will be to ensure that the information provided in the seller’s financial statements and projections is true and accurate in all material respects for the periods stated and provides a sound basis for assessing the company’s results of operations, cash flow and balance sheet information, as well as for judging the seller’s ability to sustain and grow its business in the future.


Legal due diligence will verify the valid authorization and issuance of outstanding shares and the ownership of those shares, identify rights relating to the shares, evaluate title to assets and ownership of intellectual property, review claims and potential claims against the company, and identify contracts that may need a third party’s approval to continue after the deal is completed.


Concurrent with the financial and legal due diligence review, the buyer and seller (or seller’s controlling shareholders) will draft and negotiate a Share Purchase Agreement. This agreement will establish the consideration to be paid, the mechanics of payment, the representations and warranties to be made by each party, the consequences for breach of those representations and warranties, the steps necessary to close the transaction and obligations of each party to take those steps, the conditions for each party’s obligation to close the transaction, and covenants by the seller as to how it will run its business prior to the closing. The agreement will also provide rights and procedures for termination, including any break-up fee that must be paid.


The representations and warranties section of the Share Purchase Agreement are a series of statements made by the seller to the effect that its financial statements accurately reflect the company’s financial results for the periods stated and balance sheet on the date stated, it has disclosed all material obligations and liabilities to the buyer, it is the owner of all of its assets, and it has the ability to close the transaction.


For example, the seller will represent and warrant that all of the shares being purchase have been properly authorized and issued and have the right to be transferred by each selling shareholder; that all consents and approvals necessary for the sale of shares have been obtained; that it has no outstanding issues with its key suppliers and customer; that there is no undisclosed litigation or threat of litigation; that it has filed all necessary tax returns and has no liability for unpaid taxes; and so forth.


Negotiation of the representations and warranties often center on whether the seller will guarantee that the representation and warranty in question is absolutely true, is true in all material respects, or is true to the best of seller’s knowledge. It all comes down to risk allocation.


Regardless of how those negotiations turn out, the seller will be able to list any exceptions to the representations and warranties in a Disclosure Letter. In addition, certain representations and warranties will require the seller to attach items to or specify information in the Disclosure Letter. For example, the “Contracts” provision may state something to the effect that “Except as listed on the Disclosure Letter, the seller does not have any material contracts”, and the “Litigation” clause may state that “Except as set out in the Disclosure Letter, the seller is not involved in any current litigation or subject to threats of litigation”.


The Share Purchase Agreement must also address what happens if any of the seller’s representations and warranties turn out not to be true following the closing of the transaction. Often a portion of the purchase price will either be held back or placed in escrow for a negotiated period of time following the closing to cover any breaches of the representations and warranties that adversely affect the acquired business. The seller may also want to negotiate a “basket” and a “ceiling”, a minimum amount below which indemnification does not have to be paid (akin to a deductible in a health insurance policy), and a maximum amount of total liability.


In addition to making representations and warranties as to the status of its business, the seller will normally be required to covenant that it will run the business in the ordinary course until closing (where there is a time gap between signing the agreement and actually completing the purchase and sale). This is to assure the buyer that the business it has signed up to purchase will not change before the deal is completed. The seller will also covenant to use its best efforts to obtain any necessary consent to the deal, such as bank consents and contract waivers for change of control provisions, as well as all necessary shareholder and regulatory approvals. For the period following the closing, the buyer may request that the seller’s key shareholders and directors sign a Non-competition Agreement covering a negotiated period (although these non-compete provisions are more typically contained within the sale and purchase agreement).


There will also be a list of conditions that must be present for the buyer and seller to be required to go forward with the sale and purchase. The seller will be required to “bring-down” the representations and warranties, certifying that they are true and correct as if made on the closing date. If they are not, then the buyer will be able to terminate the agreement. The buyer may also be able to walk away if the seller has experienced a material adverse change in its business. For example, if the seller’s leading customer terminates its contract, or if the main factory burns to the ground, then the buyer does not have to follow through with the purchase. Other closing conditions that apply to both buyer and seller include the receipt of all necessary consents and approvals and the exchange of legal opinions stating that the transaction has been properly authorised.


Assuming all is in order, however, the closing day will arrive and the proper documents and certificates will be delivered, along of course with the purchase price. Often, all of the required documents to be exchanged and the closing process will be laid out in a document called a completion schedule which is attached to the Share Purchase Agreement. The documents may include legal opinions, audit letters, the seller’s minute books and share registers, signed copies of required consents, waivers and approvals, and a host of other documents.


In effect, however, the closing of an acquisition is not much different from a house closing. If the purchase price will be paid in cash, it will normally be placed in an escrow account, with the agent awaiting instructions to release the funds to the seller. If a portion of the purchase price is to be paid in shares of the buyer, then the buyer’s share certificates must be delivered as well.


Once everything is in place, the seller will deliver the share certificates of the selling shareholders, along with Powers of Attorney and Share Transfer Forms, to the buyer. Then new certificates in the seller’s company will be issued in the name of the buyer and the funds will be released from escrow. At that point, the buyer will be the official owner of a new company.


While a share purchase described in this section is the most common method of purchasing an existing company, it is often the case that a purchase of assets is the optimal method of buying an ongoing business, and in some cases the only means available. So we’ll now turn to a discussion of how to purchase the assets of a company or business.

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