Despite turbulent times for the economy, the purchase of, investment in or merger with another business continues to be part of many businesses’ growth strategy, particularly where the target strengthens or consolidates a company’s position in its own marketplace.
Purchasing shares is one way to secure such an investment. Whether you are contemplating a partial investment or an outright purchase of a business, similar considerations apply.
Jonathan Fletcher, corporate solicitor with Tilly Bailey and Irvine LLP based in their Wynyard Office, comments that ‘careful analysis of the target business is critical, as is ensuring the required documentation is correctly completed. A properly formulated due diligence request for information about the target business’ history and financial performance is essential to ensure that a purchaser is able to ask the right questions before the purchase and obtain appropriate safeguards and assurances from the seller to protect their investment after the purchase.’
“We provide support not only to businesses but also to the individual business owner or director. There are certainly both commercial and personal considerations to be taken into account when considering a share purchase.”
The percentage of shareholding taken in the target business will dictate the risk and rewards you face. A minority shareholding may not give you any control of the business or produce the financial returns you anticipate; a majority shareholding will bring you a seat on the board and day to day control, if you want it, but also brings a greater share of risk.
What types of shares are you buying? Are they ordinary shares with voting rights? Has the company issued any other type of share with differing rights to vote or share in profits? Does your investment require a new class of shares to be issued? Are there any restrictions on the transfer of the shares being sold? All questions a prudent purchaser should be asking.
Do the articles of association or any shareholders’ agreement contain rights or restrictions that may impact your investment. For example, if you buy a minority shareholding and there are drag along or pre-emption rights in the either, this could impact your right to sell or not sell.
Another important question to ask is whether the shares tie you into any other obligations? Buying any shares in a company means you are taking on the liability risk of a company as well as the asset benefits. If your share purchase requires you to take on responsibility for the company’s previous shortcomings and liabilities, this could wipe out the value of your investment and place an unpalatable level of risk upon you.
Having a clearly defined purpose for your investment and level of acceptable risk will be key in navigating the purchase process successfully. A thorough due diligence exercise is a key part of the process.
Whether your investment is as an individual director or you are investing through your business, there are some issues to look out for from a personal perspective:
On purchase you may be required to sign up to an existing shareholders’ agreement, requiring you to warrant that you have no conflicts of interest and to declare any potential conflicts. Due diligence may reveal other potential conflicts such as an existing director having a competing interest with your business.
We work closely with your accountants to ensure your tax position is not compromised by the proposed investment. A personal investment may take you into a higher tax bracket, or if this investment is made through your business it may not deliver the tax advantages you anticipated.
The due diligence process will be key to allowing your entry into a share purchase as fully informed as possible. Once you give the go ahead, we will assist you in agreeing a share sale agreement and any required amendments to the target’s constitution or shareholders’ agreement, complete any filings required at Companies House, and the terms of any director’s service agreements. Our experienced team will ensure all the formalities are correctly completed on a timely basis.
If you are considering a share purchase please contact Jonathan on 01740 646000 or by email to jfletcher@tbilaw.co.uk.
Tilly Bailey and Irvine LLP has offices in Hartlepool, Wynyard, Stockton on Tees and Barnard Castle.
Call: 01740 646000
