Management Buy Out Share Sale Agreement

Management Buy-Out Share Sale Agreement


This Management Buy-Out Share Sale Agreement is based on the Company Share Sale Agreement - with Subsidiaries and Real Property. The principal differences are that the warranties have been substantially reduced; some optional conditions precedent have been added and the references to Subsidiaries have been made optional throughout.  

A management buy-out occurs when an existing management team acquires a company (possibly supported by acquisition finance from a lender and/or equity finance from a venture capitalist). This Management Buy-Out Share Sale Agreement is most appropriate for use where a management team buys a company which is a subsidiary of another. The company being bought has subsidiaries of its own (i.e. it is part of a group) and is the owner of real property (whether freehold or leasehold).

The only formal requirement to transfer shares is for the seller to execute a stock transfer form and deliver it to the buyer together with the share certificate (or an indemnity if the certificate has been lost). The buyer will usually need to have the stock transfer form stamped and pay the stamp duty on it. The buyer will then lodge the stock transfer form with the company and will become a member of the company once the board has approved the transfer and the name of the buyer has been entered in the register of members. The buyer will be entitled to a share certificate within two months. Although this process is sufficient to transfer ownership of the shares to the buyer, the buyer will usually require a formal share sale agreement because all the assets and liabilities of the company pass to it with the shares. The seller may also wish to have a formal agreement or in order to clarify its liability or ensure clear payment terms.

Optional phrases / clauses are enclosed in square brackets. These should be read carefully and selected so as to be compatible with one another. Unused options should be removed from the document.

This agreement is in open format. The form fields should be completed or the wording should be adjusted to suit your purposes.

In this agreement, the Parties are the Seller and the Buyer, which are both companies.

In clause 1 (Interpretation), please choose the appropriate wording for the definition of the Accounts. If the group of companies being sold has consolidated accounts, please choose the wording at sub paragraph (b). If Management Accounts are being provided by the Company (for example, if a long period of time has passed since the Accounts Date) then the definition of Management Accounts should be retained. There is an optional definition of “Conditions” if the sale and purchase is conditional.

At clause 2, the words in square brackets allow for the sale and purchase to be subject to the conditions set out at schedule 8. If a director of the company being sold or of its holding company is involved in the buy-out, then it may be necessary for the prior approval of the shareholders to be obtained (section 190 of the Companies Act 2006 – substantial property transactions).

Clause 3 (Consideration) refers to Schedule 7 where there is an option to choose between payment for the transaction being made by banker’s draft in favour of the Seller or the Seller’s Solicitors, or by telegraphic transfer to a designated account. Since many completions tend to take place at uncivilised hours (and thus outside normal banking hours!) an undertaking should be signed. Please see the related documents for two examples of undertakings that may be used.

Clause 6.2.1 specifies that the maximum liability of the seller under this agreement for all claims aggregated together is the purchase price. However, there is an exception for breaches of the warranties in paragraph 1 of schedule 4 (which relates to ownership of the shares and authority to sell) and of breaches of the Tax Covenant. If the seller is not in a position to sell, then they should have no limit to their liability. In a similar way, the Tax Covenant is a pound for pound indemnity for any tax liability which the Company may incur after completion and so it should not be limited.

However, in clause 6.2.2 the seller is given some protection from claims being brought for trivial breaches and so it is possible to specify a minimum value of each claim (at clause If the value falls below this amount, then the claim is ignored (this is the ‘X’ amount in the form field). A figure should be inserted in the form field such as £1,000 (the amount will vary depending on the total value of the transaction). Furthermore, at clause, it states that no claims may be brought unless all the claims of the ‘X’ amount equal or exceed a threshold (the ‘Y’ amount) such as £10,000. So, in our example, if the buyer has 9 individual claims of £1,000, he will not be able to make a claim because the threshold of £10,000 has not been reached. However, if he has 10 claims of £1,000 then he will be able to make a claim. Moreover, the buyer will be able to claim for the whole amount, not just the excess over the £10,000 threshold.

Clause 7 and clause 8 protect the buyer by placing restrictions on the use of confidential information and preventing the seller from setting up a competing business or soliciting the Company’s customers. 

Clause 9 is an optional clause where the buyer gives an undertaking to attempt to obtain the release of the seller from a specified guarantee and agrees to indemnify the seller against any liability arising after completion. This will often be useful to the transaction is completed in a short space of time and the seller has given guarantees to, for example, its bankers or its landlord.

Clause 10 provides a list of indemnities given by the seller to the buyer. The wording in square brackets can be used so as to give the Company and/or each of the subsidiaries the benefit of the indemnities if required. These cover specific risks and further matters that arise or due diligence may be included at clause 10.5.

Clause 11 deals with publicity of the sale and purchase. If the parties wish to make a press announcement, then the wording in square brackets in clause 11.1 should be retained. Clause 13 makes it clear that no third party can enforce any of the provisions of the agreement.

Clause 13.1 should be amended if, for example, the Subsidiaries have been given the benefit of the indemnities under clause 10. Any other clauses which give rights to third parties which are intended to be enforceable should be included in this clause.

Clauses 14-23 are “boiler plate” clauses that do not have much impact on the transaction but which lawyers include for good measure. These should not be amended unless there are very good reasons for doing so.

Schedule 1 must be completed with details of the Company and the Subsidiaries.

Schedule 2 must include details of all properties held by the Company.

Schedule 3 includes the Tax Warranties and the Tax Covenant. Whilst this may seem like overkill, having tax warranties is useful for extracting as much information from the seller so that any issues can be exposed in good time and may be subject to specific indemnities. The tax covenant represents a pound for pound indemnity in favour of the buyer for any tax liability of the Company exceeding the tax provision in the most recent audited accounts and for any tax liability arising between the accounts date and completion, but only if such liabilities arise outside the ordinary course of business of the Company. Because the tax covenant is an indemnity, it is much stronger than a warranty. Unlike the warranties, the losses that can be claimed under an indemnity do not have to be foreseeable and the party who has suffered loss does not have to mitigate that loss.

A brief set of warranties are included at Schedule 4. The reason for this is that, in a Management Buy-Out, the management team will have much greater knowledge of the operation of the company than the Seller(s). However, certain matters may be dealt with as at group level. For this reason, the warranties for Insurance, Pensions and Tax are in square brackets and are optional. If any or all of these matters are dealt with at group level then these warranties can be included. By contrast, if any or all of these matters are dealt with at operating company level, then each warranty can be deleted as appropriate.

Schedule 5 can be used to insert any provisions regarding pension arrangements.

Schedule 6 contains arrangements for completion and should be tailored to the transaction. It should be used in conjunction with the “Completion Checklist” which can be found in the related documents below.

Schedule 8 contains the optional conditions precedent as discussed above.

Share Sale Agreements are complicated documents. If in doubt you should seek professional advice prior to entering into one.

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