In brief - Considerations for multiple shareholders in the sale of their shares
Where a private company has a number of shareholders and those shareholders decide to sell their shares, taking a number of practical steps will help to ensure that the transaction can be efficiently concluded from negotiation to completion. In particular, ensuring that:
- prospective purchasers are not deterred by the potential complexity and greater expense and delay which can arise from there being multiple vendor shareholders, including from the possibility of having to negotiate with several different parties, and
- the multiple vendor shareholders are not unnecessarily duplicating their own expenses (including legal expenses) and delaying the realisation of their investment in the company
In this article we outline four steps in our typical approach when asked to assist multiple shareholders in the sale of their shares (and therefore the company as a whole) where those shareholders have all agreed to the sale.
1. Preliminary considerations - company constitution and shareholders agreement
When considering the sale of the company, it is important to be aware of relevant provisions in the company's constitution and any shareholder agreement in operation.
The constitution and any shareholders agreement will often contain provisions affecting the sale of the shares. For example, a shareholders agreement may contain rights of first refusal that require a vendor shareholder to offer its shares to the other shareholders before approaching third parties. Alternatively, there may be pre-emptive rights such that before a negotiated sale with a third party can proceed, the other shareholders have a right to match the third party's offer.
These sorts of provisions can be dealt with in a number of ways, including:
- via a shareholders’ resolution assenting to the sale of the shares, despite anything to the contrary in the shareholders agreement or constitution
- via the termination or variation of the shareholders agreement (if appropriate), or
- via a further agreement between the shareholders (see step 2 below)
The best approach to be taken will be dependent on a number of factors, including the provisions of the constitution and the shareholders agreement (if any) and on the number of vendor shareholders in question.
2. Exit deed may help to minimise costs and increase company's attractiveness as an investment proposal
In the context of a multi-vendor share sale transaction, the costs to the purchaser and to each individual vendor shareholder can multiply if each shareholder:
- participates in the negotiations with the prospective purchaser, and
- considers and approves amendments to the transaction documents
The potential additional costs (and associated delay) are likely to be seen as unattractive to the prospective purchaser. Further, a prospective purchaser may factor in the increased expense into its purchase price calculations, resulting in a lower offer price.
Additionally, the engagement of lawyers and accountants by each vendor shareholder is expensive and unnecessarily duplicates work.
One way to avoid these issues is via the preparation and execution by the shareholders of an "exit deed".
Under a typical exit deed, all of the shareholders agree to appoint one person (or, in some cases, multiple people) to be their collective representative for the purposes of selling the company. The representative could be a director of the largest shareholder or someone who the shareholders agree has the best skill set to manage the transaction.
The shareholders may vest in the representative rights and powers to:
- take control of, and responsibility for, the due diligence process
- negotiate with the prospective purchaser, including as to the terms of the transaction document
- instruct the lawyers acting on behalf of the shareholders, and
- attend to and manage any pre-completion or post-completion conditions
Where the shareholders are motivated to sell, agreeing to and executing an exit deed is likely to maximise the attractiveness of the company as an investment proposition for a prospective purchaser as the prospective purchaser will take comfort from seeing that the vendor shareholders are organised and committed to the sale process.
3. Transaction document warranties and indemnities
Where multiple shareholders are selling their shares, extra consideration must be given to the warranties and indemnities in the transaction document effecting the sale.
Generally speaking, the warranties and indemnities given by the vendors can be separated into two categories:
- collective warranties and indemnities
- individual warranties and indemnities
Collective warranties are those which, in the circumstances, are reasonable or appropriate for the vendor shareholders to collectively provide to the purchaser. These most often pertain to the operations of the company itself (such as warranties that the company is not in breach of any contracts or that the company's operations are compliant with any regulatory requirements).
In the event of a breach of a collective warranty, the position that the purchaser would want to achieve is that the vendor shareholders are jointly and severally liable, meaning that each shareholder is potentially liable for the whole of the loss suffered by the purchaser arising from the breach. From the perspective of the vendor shareholders, this outcome can be disadvantageous and it can leave the shareholder with the "deepest pockets" exposed to the whole of the loss regardless of its percentage interest in the company. The shareholders can take care of this issue among themselves by entering into a "Sellers' Deed of Indemnity" (see step 4 below).
In contrast to the collective warranties, individual warranties are those that are not appropriate for the vendor shareholders to provide collectively to the purchaser. Collective warranties pertain to matters specifically within the knowledge of the individual shareholders, such as ownership of the shares and the unencumbered status of the shares.
The indemnity for the individual warranties should leave only the individual shareholder who breaches the warranty liable to the purchaser for the breach, on the basis that the other shareholders should not be held liable for something outside their control or responsibility.
4. Sellers' Deed of Indemnity
In addition to the separation of the collective and individual warranties in the transaction document, a further document called the Sellers' Deed of Indemnity can be prepared which operates:
- to ensure that each vendor shareholder is only liable for a breach of a collective warranty to the extent of that shareholder's former proportionate shareholding in the company and can seek indemnity from all the other former shareholders where a claim in respect of a collective warranty is brought against them by the purchaser, and
- to provide a procedure for the handling of claims brought against the shareholders, including as to the circulating of notice of any claims and of the payment of any settlement sums.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2019.