How we helped the owners of a public company sell to a European e-commerce group

After initially assisting with the implementation of a share option scheme, the majority shareholder-directors of a 20-year-old UK e-commerce gift business instructed us to assist them with the sale of the business to a European e-commerce group.

The sale itself involved the sale of the shares in the holding company and involved many different elements and complexities throughout, in particular that the purchase price would consist of three payments deferred over a period of two years from completion (with the initial payment occurring on completion).

Our Work

Our work consisted of:

• Reviewing and advising the sellers on the heads of terms and assisting with their negotiations.
• Re-registering the target from a public company to a private limited company and liaising with the Takeover Panel.
• Assisting with the relevant general meetings.
• Amending the target’s articles of association.
• Assisting the sellers in the buyer’s due diligence exercise.
• Reviewing, advising and amending the share purchase agreement (including the use of a completion accounts mechanism).
• Carrying out a “drag along” procedure.
• Preparing a disclosure letter as well as the ancillary documentation (including board minutes, shareholder resolutions, general meeting notices, proxy forms, resignation letters and stock transfer forms).
• Preparing a debenture as security over the group’s assets while deferred payments were owed to the sellers.
• Assisting with the exercise of options and waiver of options by option holders.
• Preparing a deed of contribution that was entered into between the three majority shareholders.
• Managing completion and assisting with the relevant completion payments.

Re-registration as a private company

With all unlisted public companies who are registered and have their place of central management in the UK, the Takeover Code will automatically apply to any offers to acquire the entire issued share capital of the company. The Takeover Code itself is a set of general principles underpinned by a collection of rules that aim to govern the appropriate business standards in certain transactions while ensuring that shareholders are treated fairly and an orderly framework for a takeover is reached. Transactions that fall under the Takeover Code often result in the transaction itself taking longer to complete due to the involvement of the Takeover Panel, strict dates and deadlines that are required to be followed as well as the relevant rules that will need to be complied with.

In this instance, one route that prevented the Takeover Code from applying is through the re-registration of the unlisted public company as a private company. Given the time and cost benefits of doing so, the three majority shareholders wished to proceed with a re-registration.

To allow the re-registration to occur as quickly as possible in order for negotiations to continue apace, we proceeded with plans to re-register the company on short notice. For the general meeting to be convened on short notice, consent must have been received from:

a)     a majority in number of shareholders who are entitled to attend and vote at the meeting; and

b)     those shareholders who together hold at least 95% of the shares giving the right to attend and vote at the meeting.

We prepared and sent the relevant documents through to the shareholders and the meeting was held within 10 days of notice being given (without short notice, the waiting time would have been 21 clear days’ notice).

Furthermore, the completed short notice consents and proxy forms as well as the results of the general meeting meant that there could be no objections to the re-registration allowing Companies House to issue a new certificate of incorporation promptly after receipt of the relevant documents.

Throughout the process of re-registration, we continued to liaise with the Takeover Panel keeping them up-to-date with each relevant stage until approximately a month after liaising with the Takeover Panel, we received confirmation that the Code shall no longer apply to the transaction.

Share purchase agreement

The key document that governs a transaction involving the sale of shares is a Share Purchase Agreement (“SPA”).

We assisted the majority shareholders with the negotiation and preparation of the SPA and the deal agreed upon between the parties involved a number of unique aspects including:

1. the purchase price being paid in three (potentially rising to four) instalments;
2. security in the form of a debenture in favour of the three majority shareholders over both the target company’s assets and the target subsidiary’s assets;
3. payment of a proportion of the purchase price to be paid to a broker;
4. a completion accounts mechanism to adjust the overall purchase price by the average of the target company’s January Accounts and its accounts at completion (it was particularly important for the sellers that the January Accounts were used in some form in light of the seasonal element of the business – with a number of sales occurring around Christmas time); and
5. the exercise of share options ahead of completion.

Drag along

As the three majority shareholders together held enough shares to pass special resolutions, the articles were amended to allow the shareholders to “drag along” the remaining shareholders.

The idea behind drag along rights is that they allow the buyer of a target company to purchase the entire business preventing minority shareholders from rejecting an offer while also ensuring that these minority shareholders are forced to sell their shares on the same terms as the majority shareholders.

As part of the drag along procedure, we sent through a relevant drag along notice to each of the minority shareholders providing them with notice of when the sale is expected to complete, the key terms of the deal as well as the anticipated price per share. Once the notice period had been complied with this allowed the three majority shareholders to proceed with the sale while executing any documentation required to sell each minority shareholder’s shares on their behalf by way of a power of attorney.

Security

As a significant amount of the purchase price was deferred over a period of two years, security was agreed to in the form of a debenture while the deferred payments remained outstanding. The debentures were over each group company’s assets (being the holding company and the wholly-owned trading subsidiary), creating a fixed charge in favour of the selling majority shareholders over those assets that are not disposed of in the ordinary course of business and a floating charge over the rest of the group’s undertaking.

We prepared both debentures and filed them at Companies House upon completion occurring.

Exercise of Options

The target company had five individuals who held options over shares in the company that needed resolving prior to completion (some of which were EMI options).

We assisted the target company through structuring the initial documents so that the option holders could exercise their options and be issued with shares through a cashless exercise procedure. This allows the employees to exercise their options without paying the exercise price, instead the exercise price is deducted from the proceeds of the sale of the shares. This is often preferable for those employees who may not necessarily have the capital to exercise all of their options and provides a smoother process for all parties involved.

Furthermore, we also prepared a deed of waiver in relation to one of the option holders as the exercise price agreed was over and above the purchase price per share that the specific option holder would have received.

Deed of Contribution

As part of the transaction, the three majority-shareholders were providing a number of warranties to the buyer and they agreed to enter into a deed of contribution setting out the basis upon which any liabilities would be apportioned between them under the warranties.

As the seller’s liability was joint and several under the SPA, the buyer would normally look to those sellers with the biggest cash reserves to settle any liabilities howsoever arising. Although a seller who is pursued for the full amount of any claim could rely on the Civil Liability (Contribution) Act 1978, as it is left to the discretion of the court as to the amount of contribution recoverable from each seller, it is preferable for sellers to agree to apportion their liabilities under a contribution agreement (as was the case here).

The Outcome

After a few months of initially being instructed on the transaction, we attended a virtual meeting whereby all the final form documents were signed and dated and separately the initial completion payment was sent through to our client account.

Following the meeting, we calculated and agreed with the majority shareholders the amounts due to each shareholder before liaising with and paying each shareholder separately. The same outcome will also be repeated again as and when the deferred payments are payable by the buyer.