Share Purchase Agreements - The New And The Old Revisited

In El Makdessi v Cavendish Square Holdings BV and another [2013] EWCA Civ 1539, the Court of Appeal in the UK held that clauses in a share purchase agreement providing that, if the seller breaches restrictive covenants, the buyer's obligation to pay deferred consideration would cease and the buyer would be entitled to acquire the remainder of the seller's shares at price based on net asset value (and excluding goodwill), were unenforceable penalties. The case suggests that a careful approach will be required where a buyer of shares wants to link payment of deferred consideration to the seller's compliance with non-compete or similar covenants following completion of the transaction.

The attached checklist highlights the main legal risks that a buyer should consider when buying another business or enterprise. Legal advice should always be sought. This checklist does not explore the legal issues behind the list and is intended to outline the process and identify key points to watch out for.

Buying a business: Your legal checklist

This checklist highlights the main legal risks to consider when buying another business or enterprise. A buyer should always take legal advice at the outset of any acquisition.

Structuring the acquisition

A buyer can buy either the shares of the company that owns the target business or simply buy the assets which make up that business:

Share purchase. The buyer buys the whole company (including liabilities that it may not know about). Asset (or business) purchase. The buyer chooses the assets that it wants to buy. This will provide more flexibility, but it can be complicated to identify and transfer specific assets. Tax and accounting issues

Check how any goodwill on the acquisition is likely to be treated for tax and accounting purposes. Asset deals are typically less tax efficient for sellers than share deals, which can affect the price the buyer pays.

Deal breakers

Employees

If a buyer buys a business as a going concern (even via an asset purchase), it must take on its employees on their existing contract terms.

Pensions

The buyer may have to take over the target company's existing pension arrangements or offer prescribed pension arrangements to transferring employees.

Intellectual property rights

A brand, trade mark or patent may be the most valuable asset of the target business. Take legal advice to check that the target business:

Owns the rights. Has adequately protected the rights. In the case of asset sale...