Understanding Sale & Purchase Agreements

1 Day In-House Training Course

A “good deal” is a function of both the terms under which an exchange of contracts takes place and the price paid or received on completion of a sale and purchase agreement. A high price is no good to a seller if a large portion of the proceeds of sale needs subsequently to be handed back to a buyer in order to compensate for breaches of warranty. Similarly, a low price is not particularly advantageous to a buyer if the assets acquired prove to be subject to unexpected defects for which no redress is enforceable against the seller.

This course is also available on video
18 videos (4 hours 13 minutes)

The drafting of a Sale & Purchase Agreement seeks to ensure that a buyer receives what was anticipated and that a seller can walk away with confidence that its continuing liabilities are both known and quantifiable. As a compromise between these two extremes, the drafting of warranties and indemnities identifies the risks in a deal and decides upon whom they should fall.

Course Outline

  • Structure of a Sale & Purchase Agreement

    • Letters of Intent & Heads of Agreement – agreements leading up to the SPA
    • Definitions – remove complexity from the body of the document
    • Exchange & Completion – two separate exercises, preferably contemporaneous
      • Pre-Conditions – allow the buyer to slide out of the deal
      • Covenants – negative or positive promises
    • Boilerplate Clauses – non contentious regulation of the contract
    • Schedules – details at the back of the document
    • Comfort Letters & Side Letters – useful to oil the wheels of the deal
  • Representations, Warranties & Indemnities

    • Drafting Objectives – what do the parties wish to achieve?
    • Purpose of Warranties – retrospective alteration of the price & extracting disclosure
      • Transfer & Retransfer of Risk – a game of tennis where the risk is the ball
      • Long & Short Form Warranties – What is the difference, if any?
    • Warranties Given by the Seller – to ensure that the buyer gets what is promised
    • Warranties Given by the Buyer – to underpin the value of consideration shares
    • Indemnities Given by the Seller – to counteract the effect of a buyer’s knowledge
  • Completion Meetings

    • Management of the Meeting – importance of forward planning & a clear agenda
    • Solicitors’ Undertakings – smoothing the Way
    • Timing Problems – remove any sand from the machine before starting the meeting
      • Release of Charges – deed of release & letter of non-crystallisation
      • Money Transfers & Funding the Buyer – are the formalities in place?
      • Consideration to be Paid in Shares – do they exist and are they to be listed?
    • Completion in Escrow – only if completion almost certain with negligible time delay
  • Who Should Give Warranties?

    • Dual Purpose of Warranties – to extract information & impose liability
      • Executive Shareholders – should passive shareholders give warranties?
      • Management Buyouts – should selling shareholders give warranties?
      • Receivers & Administrators – vague assurances or something better?
      • Listed Companies – the ultimate caveat emptor deal
  • What is Disclosure?

    • Reasons for Disclosure – limitation of seller’s liability
    • Warrant the Disclosure Letter and/or Due Diligence Reports? – the buyer will ask
    • Defective Disclosure by the Seller’s Management – sue them for negligence?
    • General Disclosures – negotiation surrounding example clauses
    • Fair Disclosure – vague & ambiguous disclosures will be ineffective
    • Deliberate Non-Disclosure – tell the lawyers?
  • Effect of the Warranties

    • Breach of Warranty – if the nature of assets or liabilities doesn’t match expectations
      • Misrepresentation – innocent, non-contractual, negligent or fraudulent?
      • Rescission – when can a buyer tear up the contract?
      • Damages – different quantum under contract and tort
    • Purchaser Extends Vendor’s Liability – casting a wider net over the seller
      • Widening the Definition – extending the meaning of a warranty
      • Management Accounts – will the seller warrant them?
      • Security for Warranties and Joint & Several Liability – aim for the best target
      • Full Title Guarantee – tightening the provisions of the Law of Property Act
    • Seller Limits Liability – reduce the effect of inducements given to the buyer
      • Narrowing the Exposure – the effect of an ‘Entire Agreement’ clause
      • Unexpected Benefits – achieve a level playing field
      • References to Statutes – avoid the impact of retrospective legislation
      • Limitation Periods – seller’s liability does not continue forever
      • Floors & Ceilings – thresholds, baskets & caps
      • Debt Collection & Pursuit of Debtors – make the buyer behave responsibly
      • Conduct of Claims – different attitude to commercial claims & tax claims
      • Insurance Against Warranty Claims – worthwhile but usually considered too late
    • Date of Application – when do warranties bite?
      • Interregnum Provisions – what happens between exchange and completion?
  • Completion Accounts

    • Comparison to Audited Accounts – contentious rather than consensual
    • Mechanisms – net assets or cash free/debt free normal to actual working capital
    • Limiting Areas of Potential Dispute – cash, debt, stock, WIP, fixed assets, debtors
    • Locked Box Transactions as an Alternative – when and how is the box locked?
    • Which to Choose and why? – differences to be considered

Course Notes, Slides and Exercises

Participants will receive a booklet containing copies of 16 slides and 63 pages of very comprehensive notes. Each slide will cover a number of related topics and the accompanying notes will support the content of the course to be delivered by the trainer.

During the course of the day, participants will undertake one or two exercises (problems) in groups of two or three (depending on the size of the class) which will involve considering what advice should be given to a client in particular circumstances. Participants will discuss the exercise with each other and then with the trainer and will receive a written answer to the problem.

Exercise 1

Acting for a buyer, you are responsible for running a completion meeting which is not proceeding smoothly: the seller has produced some late disclosures, the statutory books of the target company have not been written up satisfactorily, an original copy of an important contract has not been produced and the principal selling shareholder’s share certificate has been lost. You resolve these matters and then, despite the fact that the meeting has continued interminably into the night and the banks are now closed, you arrange irrevocably for the fixed and floating charges on the target company’s assets to be released upon completion and satisfy the vendors that the consideration for the sale will be transferred to them on the following day.

Exercise 2

At a pre-completion drafting meeting on the previous day, you discuss the draft disclosure letter with the seller’s solicitor with a view to narrowing the wording of most of the general disclosures so that the effect of the warranties that you are seeking on your client’s behalf are not over-diluted.

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