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Share purchase agreement

For the consummation of a sale and purchase of shares of a private company, the principal document which would be entered into between parties is the share purchase agreement (“SPA”).

The share purchase agreement sets out all the terms and conditions of the share sale and purchase and the respective parties’ obligations in connection therewith. A typical share purchase agreement would contain, inter alia, the following provisions:

  1. agreement of parties to the sale and purchase of sale shares
  2. details of amount and nature of consideration to be paid for the shares
  3. payment, settlement and completion mechanisms and specifications
  4. conditions which must be satisfied prior to completion of the sale and purchase – typically referred to as the “conditions precedent”
  5. representations, warranties, indemnifies and undertakings  of the seller in connection with the shares, the underlying assets to which the shares relate, tax covenants etc.  (which may or may not be qualified by a disclosure letter of the seller)

Charltons services

We have extensive experience in drafting and negotiation of share purchase agreements for corporations in different industries and markets. We work closely with our client to guide them through the entire process of a share sale and purchase transaction from the pre-offer stage to completion and post-completion and we are typically heavily involved in, inter alia:

  • drafting documents;
  • due diligence and disclosure exercises;
  • negotiations with counterparties;
  • participating in completion; and
  • coordination with other professional parties and advisers.

Our clients value the quality of our people, our track record and in depth market knowledge and most importantly, our dedication to achieving the best results for our clients through technical expertise and commercial pragmatism.

 

For the consummation of a sale and purchase of shares of a private company, the principal document which would be entered into between parties is the share purchase agreement.

The share purchase agreement sets out all the terms and conditions of the share sale and purchase and the respective parties’ obligations in connection therewith. A typical share purchase agreement would contain, inter alia, the following provisions:

  • agreement of parties to the sale and purchase of the shares
  • details of amount and nature of consideration to be paid for the shares
  • the payment, settlement and completion mechanisms and specifications
  • conditions which must be satisfied prior to completion of the sale and purchase – typically referred to as the “conditions precedent”
  • representations, warranties, indemnifies and undertakings  of the seller in connection with the shares, the underlying assets to which the shares relate, tax covenants etc.  (which may or may not be qualified by a disclosure letter of the seller)

We consider below certain aspects relating to the entering of share purchase agreements:

Drafting of share purchase agreement

It is normal for the buyer’s solicitors to produce the first draft of the share purchase agreement although quite often the seller’s solicitor would produce the first draft in connection with a sale of target company through controlled auction.  In such auction scenarios, often the seller may put together a data room or disclosure package prepared against a set of warranties which are significantly less onerous for the seller based on which the buyer would an offer.

Tax covenants

It is common for the buyer on a share purchase to seek protection against potential tax liabilities in the form of :

  1. tax covenant contained in the share purchase agreement or in a separate tax deed; and/or
  2. tax warranties in the share purchase agreement.

Tax warranties operate similarly to other warranties in the share purchase agreement (discussed above). Tax covenants on the other hand provide the buyer with a remedy in respect of liabilities to tax that relate to events arising on or before completion. It is effectively an agreement that allocates tax risk before completion or before the last accounts for the seller and the tax risk after either of these cut off points for the buyer.

Tax covenants are generally more effective than tax warranties given that the buyer would recover the amount of liability under tax covenants rather having to prove damage from loss (limited to those losses which are reasonably foreseeable as a likely result of breach) in the case of a claim of breach of tax warranty. Further, the buyer do not have a duty to mitigate loss resulting from a breach of warranty under a tax covenant. However, tax warranties are still important in respect of representations concerning pre-completion events that affect post-completion tax liabilities (e.g. a warranty that there have been no claim for a roll-over relief) and in respect of deferred taxes.

Indemnities

Indemnities are normally included in share purchase agreement to cover specific risks which are of particular concern to the buyer (especially where warranties are simply not enough or difficult to pursue). For example, where the target is involved in any unresolved litigation, the buyer may require the seller to bear the risk of the outcome of the litigation in the form of an indemnity. The advantage of an indemnity over warranty is that the buyer’s actual awareness of relevant facts and circumstances of the defect would not be a defense against his/her claim of breach of warranty.

Other than tax indemnities, other risks commonly covered by indemnities are:

  • environmental risks;
  • doubtful book debts;
  • repayment of loans by the target;
  • product liability claims in relation to products sold before completion;
  • litigation for infringement of intellectual property rights that may have a significant impact on the target’s business.

Depending on the bargaining position between parties, the buyer may require the seller to give warranties on “an indemnity basis” although the seller may resist and limit indemnities to specific identified risks.

Accounts

A buyer will normally be provided with audited accounts of the target group as well as previous sets of accounts, financial statements and management accounts. The seller would usually agree to provide warranties, inter alia, that the audited accounts give a true and fair view and comply with applicable laws and accounting standards. Although often contested by the seller, the buyer may also request management accounts to be prepared on the same standard as audited statutory accounts.

Extensive warranties may be sought in relation to all aspects of the target’s business since the balance sheet date of the latest accounts. For example, such warranties would confirm that there has been no substantial acquisition or disposal of assets or entering of material contracts other than in the ordinary course of business, by the target company.

Share transfer and stamp duty

To effect a transfer of shares of a Hong Kong company, the following documents will need to be signed by both the transferor and transferee of Hong Kong shares:

  • an instrument of transfer (an adjudication fee of HK$5 is payable to the Stamp Office payable prior to or on the date of the instrument of transfer); and
  • bought and sold notes (if executed in Hong Kong, it must first be submitted to the Stamp Office for adjudication. If the instrument is executed outside Hong Kong, it needs to be stamped within 30 days after execution).

The bought and sold notes attract ad valorem duty at the rate of 0.2% of the consideration or the net asset value of the shares, whichever is higher. Such duty is normally shared between the transferor and transferee. The latest audited financial statement will also be submitted when the above transfer documents are submitted for adjudication.

Transfer of shares between parent and subsidiaries or between fellow subsidiaries may be exempt from stamp duty. An application, together with a statutory declaration and supporting documents to show, inter alia, the relationship between the transferor and transferee, must be submitted to the stamp duty office for intra group relief from stamp duty.

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