The recent case of TP ICAP Ltd v NEX Group Ltd [2022] EWHC 2700 (Comm) highlights the importance of the disclosure process in a corporate acquisition/sale and also the requirements to have a clear and detailed notice of breach of warranty claim that is compliant with the requirements in the share purchase agreement (SPA), when providing notice of a claim.

The buyer (TP ICAP) intended to bring a claim against the seller, NEX Group Ltd for a breach of warranty claim failing to disclose certain documentation relating to a specific warranty under the SPA. The seller then argued that the claim should be struck out due to an ineffective notice of claim provided by the buyer.

The High Court did not strike out the breach of warranty claim under the SPA on the basis that the notice of claim provided by the buyer to the seller under the SPA failed to meet the notice requirements found in the terms of the SPA, specifically a limitation of liability clause.

This limitation required the buyer to provide written notice of the breach of warranty claim to the seller before a specified date which would state in reasonable detail the nature of the claim involved.

The warranty in question was limited by the seller’s awareness, which under the SPA was defined as the “actual knowledge” of eight specific individuals. The warranty in question was regarding there being no existing or pending non-routine investigations by a government authority in relation to the target company’s employees or officers which would have a material adverse impact on the running of the target business.

The proposed breach of this warranty was opposed by the seller as they asserted that the seller’s awareness meant that for there to be reasonable detail of the nature of the claim in the notice of claim, that it should include those individuals who are deemed to have knowledge in the SPA. The seller argued that as the notice failed to state that any of those individuals had knowledge, that it is an invalid notice. The seller also argued that because the notice did not identify why the breach would result in a material adverse impact on the target business, that the notice is ineffective.

The High Court rejected the seller’s argument. The notice requirements under the SPA did not specify that the individuals’ names would need to be included in the notice of claim. The judge was also of the view that there was nothing in the SPA that required an explanation or detail in the notice of claim as to why the breach (relating to the investigation by a governmental body) would adversely impact the running of the target company, and the omission of such in the notice would not result in the notice of claim being ineffective. The judge in this case had the view that the seller’s argument would require the buyer to do more than what is required pursuant to the SPA.

Overall, the High Court said that the breach of warranty claim should go to trial and should not be struck out due to the ineffective notice of the claim. This case is therefore ongoing; however, it does illustrate the importance of the disclosure process and in order to bring a breach of warranty claim, the buyer should ensure they comply with the SPA requirements when providing a notice of claim under the SPA.

For further advice and assistance please contact our Business Services team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

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In a private share acquisition, the parties enter into a Share Purchase Agreement. This agreement is the core document governing the transaction; documenting the terms and conditions of the transaction. Every transaction is different and therefore every Share Purchase Agreement is different and should be tailored to your transaction. However, there are common provisions that a Share Purchase Agreement should have:

1. Operative Provisions

These are provisions that set out what the parties are buying and selling, how much for and when monies are due. It is crucial that these are carefully drafted so that there is clarity for both parties on what they are getting out of the deal and when. Whilst it may seem like these are obvious and straight forward, they are often complex to account for deferred consideration and purchase price adjustments (for example to account for cash and debt as at completion, net assets as at completion or even post-completion performance of the target). Getting this wrong could result in lengthy litigation due to misunderstandings of what is expected, or even a contract failing altogether due to lack of clarity. Therefore, it is best to engage with your solicitors to ensure these are concisely drafted to reflect your intentions.

2. Warranties

A share purchase is a high risk transaction, particularly because a buyer inherits a company’s liabilities as well as its assets. Therefore, a prudent buyer usually seeks assurances from a seller in the form of warranties. These are legally binding promises and statements about the company being acquired and its business, inducing the buyer to enter into the contract itself. If these warranties turn out to be untrue, this could give rise to a claim against the seller. Therefore, these need to be carefully negotiated to ensure that their scope is sufficient protection for the buyer, but not an unrealistic demand on the seller.

3. Restrictive Covenants

When taking on a business, any buyer will want to ensure that the Seller doesn’t set up a new business in direct competition with the one they have just acquired. Therefore, to protect the goodwill of their new company, a buyer will commonly require a series of covenants from the seller preventing competition and poaching. These should be reasonable to be enforceable, that is they cannot be too onerous in terms of how long they apply for. They should also have a geographic element as they limit the restriction to the territories in which the buyer’s business has operated to date.

Of course, these are only some elements that will need careful consideration. Other provisions such as a Tax Covenant, completion accounts and buyer covenants may all form a part of a transaction. To mitigate risks, it is also important that the buyer undertakes detailed due diligence to understand the business they are acquiring pre-completion and that the Sellers make full and frank disclosures in a Disclosure Letter.

Buying and selling shares is a complex process with many factors to account for and our Business Services team is here to help every step of the way. If you would like to know more about the process and documentation involved, contact us on 01604 828282 / 01908 660966 or email BusinessServices@franklins-sols.co.uk.

Don’t I just need a Stock Transfer Form?

As a corporate lawyer, dealing with the transfer of shares is fundamental to the nature of work that I undertake. Whether a sale to a third party, a company restructure or Management Buy-Out, transferring shares is key to corporate transactions. However, what worries me is the number of enquiries that I receive expecting that all you need to do is sign a Stock Transfer Form.

Whilst a Stock Transfer Form is undoubtedly necessary to any share transfer, it is only one element of a transaction and fundamentally lacks detail that can be imperative to protect both buyers and sellers and maximise a return on the deal. As a Seller, what happens to all of your hard-earned cash that is vested in the Company? As a buyer, how can you be sure that you are getting what you are paying for and protect future goodwill of dianabol buy sternocleidomastoid dianabol buy the Company? What about the structure and tax implications of the deal? A stock transfer form on its own does not address these points or offer any protection.

So, what do you need?

Due Diligence

Almost everyone has heard of the phrase ‘Buyer Beware’. This applies to buying and selling shares just as it does any house purchase. The buyer should raise enquiries to ensure that they have an understanding of what they are buying before they proceed.

Share Purchase Agreement

This is key to any share transaction and includes the obligation to buy shares itself. It can also determine:

No two transactions are the same and as a result the Share Purchase Agreement may be very simple or it may be complex depending upon the terms agreed, value and nature of the transfer taking place.

Disclosure Letter

A Disclosure Letter is a key protection for any seller as it formally notifies the buyer of facts or circumstances in relation to the Company that could otherwise give rise to a claim. It gives the buyer reassurance and certainty as to the scope of any concerns with the company and enables them to plan on how to address them once they have control.

Ultimately, a Disclosure Letter alongside the Due Diligence is about transparency and certainty for both parties.

Power of Attorney

This may seem like an unusual one for a share transfer, but it is crucial from a technical perspective for any prospective buyer. Most people are not aware that legal ownership of shares does not transfer until Stamp Duty has been paid on your transaction and the Statutory Books written up. Once the Stock Transfer Form has been delivered to you duly signed and you have paid the seller the monies they are due, it then has to be sent to HMRC for stamping. This must be done within 30 days … and I am going to make no comment on the time that it may take for HMRC to stamp and return the Stock Transfer Form to you! However long this may take, you do not legally own the shares, and therefore company, that you have paid for during this time. If you declare a dividend, that would still belong to the Seller as the current owner. The Power of Attorney transfers all rights to you in this interim period so that you can exercise all powers in respect of the shares and benefit from them as an owner of the Company notwithstanding that your Stock Transfer Form may still be with HMRC.

Ancillary Documents

Every company must comply with the provisions of the Companies Act 2006. Failure to do so is an offence and could stand to undermine a transaction on the ground of lack of authority. Every transaction therefore has a series of ancillary documents which are required to approve the share transfers and company changes that may happen as a result. This may include board minutes, shareholders resolutions, resignation letters and notices for the changes in persons with significant control over the company. Certain forms would also need to be filed at Companies House to notify of changes that have taken place in respect of the Company. The scope of ancillaries can be small for a more straight-forward transaction, but if you are transferring shares as part of a restructure or if you have a complex company transaction the number of ancillaries can be significant!

Your success

Structuring a transaction properly with the requisite documentation affords protection to the parties, clarity to the contract and ultimately can make sure that a transaction is structured in a tax-efficient manner. It reduces the risk to you, maximises the return you receive and ultimately ensures a successful transaction allowing you to realise the return on your investment.

For more information on Stock Shares, visit our Business Services page.

If you would like to discuss the structure of a transaction and requirements for share transfers, please contact Holly Threlfall, Solicitors in our Business Services team holly.threlfall@franklins-sols.co.uk or call 01604 828282.