Share sale or business sale: Things to think about #1: Who or what is selling?

January 2025

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This is the second (the first can be found here) in my series of Guides in which I explain lots of ways in which company sales and business sales are different and give some food for thought as to what you need to cover, whether you are selling or buying, to ensure you don’t miss anything or mess things up. You should ideally be aware of all this if you are a business owner who might ever want to sell (or buy) a business (or a company…).

This second Guide focusses on some of the things to think about based on who or what is doing the selling.

Business sale – the company is selling

When a company is selling its business, you only have one seller – the company itself, which is selling the business and the assets used in it as a going concern. The owners of the company (the shareholders) are not selling the business. They can only sell their shares in the company. It is important to understand this distinction, which is overlooked surprisingly often.

A company is a separate legal entity. A director of the company will need to sign the business sale agreement in their capacity as a director of the company. The decision to sell its business is down to the directors of the company, who run the company, and not down to the shareholders (save to the extent that they have the power to load and control the board of directors).

So the decision of a company’s directors to sell its business should be relatively easy compared to the process of having to round up all the shareholders in a company to sell their shares.

Having said that, if the company is owned by a number of shareholders then you do need to check that there is no shareholders agreement or anything in the company’s Articles of Association which gives any shareholders veto rights on whether the company can sell a material part of its business without their consent.

On a business sale, you also need to check whether the company actually has the right to sell its business. If the company has secured lenders, particularly debenture holders, the company will not have the right to sell unless it pays off the lenders or gets their consent to the sale.

A business buyer may still want to insist that some shareholders become a party to the sale agreement, even though they are not the sellers. Here are some reasons:

• The buyer may worry that the company may not be able to meet its liabilities under the warranties and indemnities in the sale agreement. After all, a company will usually be left with no assets after it has distributed the business sale proceeds to its shareholders. It may even go into liquidation soon after the business sale. So the buyer may well want to ask some key shareholders to be parties to the sale agreement so they can directly give warranties or indemnities or guarantee the company’s liabilities as seller.
• Likewise, restrictive covenants from the selling company (such as not to compete with the business, or poach customers or staff) are usually pretty useless on their own, as the company will often stop trading after the business sale (unless it is only selling a part of its business and is keeping other parts going). What the buyer will really want is for any shareholder who has been working in the business or close to the business to sign up to the agreement and enter into such restrictive covenants themselves.

Some shareholders may also become involved in relation to other aspects of the deal. For example if the business operates from premises owned by any shareholder or its pension fund, or if the buyer wants any key employee shareholders to carry on working for the business after completion, these issues will need to be dealt with.

Share sale – the shareholders are selling

In a share sale the shareholders will usually all need to sell their shares in the company to the buyer. There could therefore be several sellers, all of whom will need to be parties to the sale agreement.

Different sellers could have different backgrounds or interests, or different classes of shares. The buyer will usually be looking to negotiate the deal with just one key shareholder or a small number of key shareholders who between them own a controlling interest in the company. Other shareholders may have smaller minority shareholdings, and may have different backgrounds. For example, they may be investor shareholders, or employee shareholders, or family trusts. Each of these shareholders may have different interests which need to be addressed, which may not always align with those of the key selling shareholders. They may need independent legal advice.

You also need to check carefully whether there is any shareholders agreement between shareholders, or anything in the company’s Articles of Association, such as veto rights or pre-emption rights, which needs to be looked at and dealt with before you can simply put together a deal to sell your company to a buyer.

Dragalong rights

A ’company sale’ does not always have to mean that a buyer buys all the shares in the company. The control of a company is generally held by any shareholder or group of shareholders who together own over 50% of the shares in the company, which means they can control who the directors are, the directors being the people who actually run the company. However, this all depends on the actual share structure and the constitution (Articles of Association) of the company, so these need to be looked at very carefully.

Usually any buyer will want to buy all the shares in the company, rather than having to share the company with any inherited shareholders who have not sold their shares.

It is therefore important to ensure that the majority key shareholder/s will be in a position to procure that whenever they decide to sell their shares they can also force all other shareholders to sell their shares. There is no general law entitling them to do this (save in respect of very small shareholdings), which is why it is so important to ensure that you put ‘dragalong’ provisions in your Articles of Association which give you this right. Ideally ones which include a power of attorney so that you don’t have to go to court if a shareholder still refuses to sell even when he is contractually obliged to do so.

Warranties and indemnities

On a share sale you might spend some time and effort agreeing which sellers should give various comforts and protections to the buyer in the sale agreement, such as warranties and indemnities. Smaller shareholders (particularly those being ‘dragged along’) may not be expected (and usually can’t be forced) to give warranties and indemnities. Many VC investors may refuse as a matter of policy to give any warranties and indemnities. Other shareholders may be prepared to give some warranties and indemnities, but may want these limited (for example, capped at a certain amount, or trustees will often limit their liability to trust funds they actually hold). So the whole process of negotiating different warranties and indemnities and seller protection provisions can become very complex when you have a number of different sellers.

That’s all for now. The next Guides in this series will focus on some of the many differences between share sales and business sales as regards things are actually being sold and how to go about transferring them.

 

What next? Contact me for a complimentary business sale consultation.

If you would like to discuss any of the issues raised in this Guide or any other issues relating to the possible sale of your business (or company!) please feel free to email me at andrew.james@onhandcounsel.co.uk to arrange a complimentary consultation where I can help you to identify what might be involved and how I can help. This will help you to avoid some of the pitfalls to which you might otherwise be exposed, and give you the peace of mind of knowing that you have an approachable competent corporate lawyer ONHAND who can provide you with experienced, effective and cost-effective advice and assistance.