Once the majority of the due diligence process has been completed to the satisfaction of both parties and there is mutual agreement to proceed, the focus shifts to the preparation and negotiation of the transactional documents. These documents form the legal backbone of the deal and are essential to ensure the transaction is properly executed and that both parties are protected.
Key Transactional Documents
The primary documents for a share sale is the Share Purchase Agreement (SPA) and for an asset sale an Asset Purchase Agreement (APA), typically drafted by the Buyer’s legal advisers. However, the SPA or APA rarely stands alone, and it is accompanied by several ancillary documents, each serving a specific purpose in the transaction.
1. Share Purchase Agreement
The SPA is the central contract that governs the sale and purchase of shares. Its main functions include:
- Recording the commercial terms of the transaction (e.g. price, payment structure, completion date)
- Setting out conditions precedent to completion (e.g. regulatory approvals, financing)
- Detailing representations and warranties made by the Seller about the target company.
- Including restrictive covenants, such as non-compete clauses, to protect the Buyer post-completion.
The SPA is heavily negotiated, with each party seeking to protect its interests and achieve the best commercial outcome.
2. Asset Purchase Agreement
The APA, like the SPA, is the central contract that governs the sale and purchase of assets. Key provisions include:
- Recording the specific assets (or liabilities) to be transferred
- Detailing the consideration, whether it is a combination of cash, shares or loan notes and the timing of payment of the consideration.
- Practical mechanics of how the assets are to be transferred, whether by formal transfer, assignment, or delivery
3. Disclosure Letter
Prepared by the Seller’s legal advisers, the Disclosure Letter is a critical document that qualifies the warranties given in the SPA or APA. It contains:
- General disclosures (e.g. public records, known facts)
- Specific disclosures against individual warranties
The purpose of the disclosure letter is to limit the Seller’s liability. If a warranty is found to be untrue but has been properly disclosed, the Buyer may not be able to claim for breach of warranty.
3. Tax Covenant
If not included within the SPA, a separate Tax Covenant may be drafted to allocate responsibility for pre-completion tax liabilities. This is particularly important in deals involving complex tax structures or international elements.
4. Stock Transfer Form(s)
Contrary to common belief, the SPA does not transfer legal title to the shares. The Seller must deliver a duly completed and executed stock transfer form for the target shares. The transfer must then be approved and registered by the target company’s board post-completion.
5. Other ancillary documents
The transfer of ownership of an asset is dependent on the type of asset it is. For example, this could include property transfers or lease assignments, assignments or novations of contracts, and assignments of IP.
In addition, certain assets that are being sold may be subject to third-party security, such as a debenture, and this will need to be released so that the asset can be transferred.
6. Security Documents (if applicable)
Where part of the consideration is deferred, or there is a split between exchange and completion, or the buyer wants security for breach of warranty, security documents may be required to protect the party seeking the security. These can include:
- Debentures over the target company’s assets
- Charges over shares of both the Buyer and the target company
- Personal guarantees from the Buyer, the Seller or its directors
Negotiation and Execution
Each document is reviewed and negotiated by the parties and their advisers. Amendments are made to reflect commercial agreements, manage risk, and ensure legal compliance. Once all documents are finalised, the parties proceed to sign and complete the transaction.
Transactional documents are more than just formalities; they are the legal instruments that bring a sale to life. Understanding their purpose and implications is essential for both Buyers and Sellers. With careful drafting and negotiation, these documents help ensure a smooth transaction and protect the interests of all parties involved.
How can we help?
Clear transactional documentation is essential to achieving a clean sale and avoiding disputes later. We guide clients through the negotiation of the SPA or APA and all related documents, including disclosure and tax provisions, transfer mechanics and any required consents. We focus on getting the details right while keeping the process pragmatic and commercially driven. Speak to our head of corporate and commercial, Victoria Holland, today.
About the author
Zarenna Porter is a solicitor in the Corporate and Commercial department. Her work spans a wide range of corporate and commercial matters, including acquisitions and disposals, share buybacks, company reorganisations and the drafting and negotiation of commercial contracts and agreements. She has supported businesses operating across different sectors, tailoring her advice to suit the distinct needs of both sole traders and larger corporate entities.