Investment in another company may be part of your business growth strategy, especially if you operate in the same market or supply chain. Acquiring a slice of the pie through the purchase of shares is one way to secure such an investment and may seem attractive and beneficial. Whether you are contemplating a partial investment or an outright purchase of a company, similar considerations apply.
‘There are a combination of commercial and personal factors which one has to be aware of when investing in a company through the acquisition of shares,’ comments Danielle Austin a Corporate Solicitor at Geoffrey Leaver Solicitors. ‘Careful analysis of the target business is critical, as is ensuring the required documentation is correctly completed.’
There are several commercial decisions which will need to be explored with your solicitor. Here are some key examples:
- Percentage of shares. It may sound obvious but the percentage of shareholding you will take in the target company will have consequences for the amount of risk and rewards you sign up for. A minority shareholding may not yield the returns you anticipate, whereas a majority shareholding will bring more access to rights and a greater share of risk.
- Types of shares. Investigation into the corporate structure will reveal the types of shares already in issuance and the types of shares the company may consider issuing in the future. For example, ordinary shares with voting rights may be more suitable to a larger share purchase. Or if your investment dictates a new class of shares has to be issued, this may be a cost you are asked to cover.
- Rights and restrictions. A diligent read through of the existing articles of association or the shareholders agreement will highlight any notable rights or restrictions that may impact your investment. For example, if you only have a minority shareholding and there are drag along rights in the articles of association or shareholders agreement, this could impact your right to sell or not sell. Anti-compete clauses are another issue to look out for.
- Other obligations. 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 is contingent on you taking personal responsibility for the company’s previous shortcomings or to fix or pay for liabilities, this could negate any value of your investment.
Just from the few examples above, it is clear that reading the small print and having a clear vision of your investment goals and risk appetite 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 generic issues to look out for, including:
- Conflict of interest. There may be provisions in the shareholders agreement requiring shareholders to warrant there are no conflicts of interest. While on the face of it, you may think there are no conflicts, detailed due diligence may reveal otherwise. For example, other (minority) shareholders may be your employees or there may be someone on the board of directors who has a competing interest with your business that you were not aware of.
- Tax position. Checking your tax position with a tax specialist is strongly advised for any investment. It is better to be forewarned than not – especially if it transpires that a personal investment may take you into a higher tax bracket, or if this investment through your business will not deliver the tax advantages you anticipated.
Prior to any documentation being completed, asking the right questions, knowing where to look for the answers and spotting any anomalies through the due diligence process will be key so that you go into the share purchase as fully informed as possible.
Following this, any share purchase will typically require entry into a share purchase agreement, shareholders agreement, completion of corporate filings such as board minutes, and issuance of share certificates and in some instances, director service agreements and amendments to existing articles of association. An experienced team of lawyers and accountants will be critical to ensuring all the formalities are correctly completed and on a timely basis too.
How we can help
From dedicated due diligence to filings with Companies House, we have a strong team of experts across corporate and commercial which will allow us to deliver streamlined, comprehensive advice to take you from start to finish of a successful share purchase.
For an informal discussion, please contact Danielle Austin in the Corporate and Commercial team on 01908 689399 email firstname.lastname@example.org. Geoffrey Leaver Solicitors has offices in Milton Keynes, Buckinghamshire.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.