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Sale and Transfer of Shares / Initial Public Offering

A. Sale and Transfer of Shares

The following checklist is to help the Buyer in the purchase and transfer of shares in a company.

In case of acquisition of the whole company, please refer to the section relating to "Mergers and Acquisitions". 

1. Confidentiality

It is likely that sensitive information will be exchanged between the seller and buyer about the transaction and their respective businesses. Therefore, a confidential undertaking/non-disclosure agreement is signed to ensure all information exchanged between the parties stays confidential and will not be disclosed to a third party.

2. Heads of Terms

The purpose of the head of terms agreement is to record the essential terms and conditions agreed upon by the parties during the negotiations stage. Generally,  the head of terms are not binding on the parties and it should be expressly stated in the agreement for clarity. Though they are not binding, it is useful to have one since they remove misunderstanding by addressing the key issues; expedite negotiations; provide a framework for exclusivity and confidentiality commitments, and act as a moral commitment to proceed with the transaction.

The head of terms generally include:

  • details of the proposed agreement
  • payment terms
  • the time frame for completion
  • restrictive covenants
  • due diligence arrangements
  • exclusivity i.e. whether the parties are restricted from negotiating with other parties
  • any provisions that will be legally binding such as confidentiality and exclusivity

3. Timetable

· Will specialist input (e.g. tax, environment, IP, property) be required?
· Are external advisers (e.g. lawyers, accountants) required/involved and who will be instructing them?
· Will finance need to be raised (see below)?
· Time available for due diligence (see below)?
· Will Heads of Terms be concluded (see above)?
· Will the execution and completion of the Agreement be simultaneous (or should they be)? If different, how much time is needed between contract and completion?
· What clearances/consents are required (see below)?

4. Company Information

As a buyer, it is important to conduct thorough due diligence and get detailed information from the seller regarding their business operation such as:

  • whether it is a single company or a group of companies?
  • Is it a public or a private company? Has it been listed on the Stock Exchange?
  • where is the company located?
  • which locations does the company operate in?
  • where is the main value to the Buyer in the company e.g. strategic, cash flow, investment value?
  • whether there any particular concerns of the Buyer e.g. loss of existing management, liabilities?
  • what is the proportion of shares being sold and what about other shareholders? Is a shareholders' agreement required?
  • does the industry in which the company operates create particular concerns (e.g. environmental) or require particular consent? Can these be dealt with specifically in the agreement?

5. Rights of Pre-emption

Pre-emption rights are rights for the existing shareholders to buy the shares first on the basis of equal price and terms. There are no common law pre-emption rights. Shareholders in unlisted companies may, however, be bound by pre-emption provisions in the articles of association or a shareholders' agreement which affect their ability to transfer shares. One should check the articles and any shareholders' agreement to confirm if other shareholders have the right to receive purchase the securities before they are sold to third parties.

B. Purchase of Own Shares

The basic common law position is that a limited company (by share capital or guarantee) may not purchase its own shares. The rationale for the decision was the principle of maintenance of capital. A company limited by shares has only its capital to back its credit. For this reason, the principle of maintenance of capital was developed by the courts for the protection of creditors. The prohibition applies whether the acquisition is by purchase or by subscription or otherwise.

Exceptions to Basic Rule

There are exceptions to the common-law rule.
1) neither applies to unlimited companies, the rationale being that the credit of an unlimited company is based not only on the capital of the company but also on the unlimited liability of its members for its debts.

2) the following acquisitions are specifically exempt:

  • an acquisition by a company limited by shares otherwise than for valuable consideration of its fully paid shares - for example, by gift or bequest;
  • redemptions or purchases relating to purchases and redemptions of own shares;
  • an acquisition in a duly authorised reduction of capital - a company is permitted to make a payment out of capital only to the extent that the purchase price exceeds its available profits and the proceeds of any fresh issue made for the purpose of the purchase;
  • purchases pursuant to court orders; and
  • where shares are forfeited or surrendered pursuant to a company's articles of association for failure to pay any sum payable in respect of the shares.

C. Offer to the Public and Prospectus Requirement

The basic position in most common law countries is that no new securities are to be offered to the public unless a prospectus has been submitted to the regulator. In most jurisdictions, the public means 50 or more people. In addition, an offer to the public does not mean 50 people buying securities in the Company. If an offer can be seen (e.g. online advertisement) by more than 50 people in a jurisdiction, then it can be considered to be an offer to the public in that jurisdiction.

The prospectus requirements only apply to securities that are unlisted (even though the subject of an application for listing - i.e. initial public offering) when the offer is made. Secondary offers of securities that are already admitted to official listing, even if made to the public, do not require listing particulars nor a prospectus.

There are various exemptions from the prospectus requirement. The most useful exemption which is relied on for offerings of securities is that relating to certain "Professional Investors" without preparing a prospectus. Different jurisdictions may have slightly different definitions of "Professional Investors". Please check with your local legal counsel. 

D. Initial Public Offering

In an Initial Public Offer (also known as an "IPO"), shares of a company are introduced to the public to be traded on a stock exchange for the first time. Access to the retail market may be obtained through:

  • a retail offer, which is typically an offering of shares to members of the public  or through their brokers;
  • an institutional offer which is a form of retail offer restricted to professional or institutional clients).

The reasons for conducting an IPO may include:

  • increasing demand for the shares - retail investors tend to apply for shares by value, not by number, and are thought to relatively price insensitive.
  •  raising the public profile of the company - a retail offer is usually promoted through the medium of the press, TV, and radio coverage, poster campaigns, and, increasingly, via the internet.

Most IPOs now involve book building for institutional offerings. The issuer will usually announce the percentage of the total offer which it expects to make available to retail investors. The offering period for a retail offer is usually shorter than for the institutional offer. This is purely for logistical reasons; it generally takes longer for the receiving bank to process the retail applications and communicate the results of the retail offer to the global coordinator than it does to work out the results of the institutional offer. A prospectus will be issued for both retail and institutional investors.

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