Sale of 75% of the share capital in an emerging tech company
Gannons represented a company on the sale of 75% of their share capital to a large American corporation for over £8 million, plus deferred consideration.
Gannons represented the business being sold and its shareholders. There were a number of parties’ interests to maintain, tricky issues to navigate and an incredibly tight timescale to manage.
Heads of Terms
The company was incorporated in 2014 and has since gone from strength to strength expanding into three further jurisdictions due to its specialist knowledge of certain custom solutions in the tech world.
We knew the company was fairly young and so to attract the right price, the shareholders relied upon future revenue paid as deferred consideration. With this in mind we reviewed and advised upon the heads of terms which set the parameters of the deal, the basic terms of the earn-out, and contingent consideration. We ensured that the key director was able to direct revenue post acquisition and remained in the business on terms which incentivised him to perform.
Reviewing the Share Purchase Agreement (SPA)
We had to ensure that the entire SPA represented the deal the shareholders expected; that it did not limit their rights or contain overly onerous warranties or indemnities. We had to ensure that Earnings Before Interest and Taxes (EBIT) calculations were fair and in-keeping with the type of business, profit, and working share capital we were dealing with. We worked through a number of commercial decisions, such as personal guarantees and negotiated solutions.
The shareholders going forward
The sale process can become frustrated with so many opposing interests. This can be particularly difficult when the shareholders are to remain involved in the business or even as employees. Sale negotiations become crucial. It takes a number of negotiation tactics to ensure we strike the right deal for our clients whilst continuing the deal moving forward.
As in many deals of this nature, this involved amending the Articles to ensure protections on both sides of the table were sufficiently provided for. We also advised and negotiated employment contracts that complemented the sale documentation and the continuing the working relationship going forward.
The warranties, disclosure letter and all things data
The individual sellers are liable for warranties to be claimed by the incoming buyer in case of breach. To mitigate the risk for the individuals we disclose any relevant documentation against the warranties. This reduces the risk and exempts them from claims on matters disclosed where possible and necessary. This ranges from organisational structures to insurance; employees to accounts; and disputes to company constitution. Sellers often have concerns about their liability compared to other sellers. We can advise on a number of options available to ensure everyone is comfortable with their individual liability.
It was important, as entrepreneurs, that the sellers had permission to continue to work on their other businesses. This involved careful negotiations in relation to specific carve outs and limitations on the restrictive covenants.
Good leaver/bad Leaver
As employees, the sellers were to remain part of the business’ family. This involved good and bad leaver provisions, affecting their earn-out and remaining shares in the company. This also involved negotiating and drafting completely bespoke consequences and definitions of good and bad leavers.
The sellers were keen to ensure that entrepreneur’s relief would apply on the current sale, and upon any future sale of their remaining 25%. This involved us providing specific tax advice and negotiating to ensure this was a possibility.
The consideration payable included an earn-out relying upon a calculation of EBIT. The earn-out also had specific inclusions and exclusions, calculations, limitations, and forecasts. When a large group take over a singular company the policies, methods, and calculations often become replaced. This can have a large effect in circumstances where there are contingent considerations based on calculations the sellers no longer have control on. It is important to ensure that the sellers are not only protected, but can understand how this will happen practically.
Gannons were efficient, commercial and tech savvy. They understood our needs and manged to get us over the line in a tight timeframe.