Australia: Multi-vendor share sales - practical steps to minimise expense and delay

IN BRIEF - CONSIDERATIONS FOR MULTIPLE SHAREHOLDERS IN THE SALE OF THEIR SHARES

Where a private company has a number of shareholders and those shareholders decide to sell their shares, taking a number of practical steps will help to ensure that the transaction can be efficiently concluded from negotiation to completion. In particular, ensuring that:

  • prospective purchasers are not deterred by the potential complexity and greater expense and delay which can arise from there being multiple vendor shareholders, including from the possibility of having to negotiate with several different parties, and
  • the multiple vendor shareholders are not unnecessarily duplicating their own expenses (including legal expenses) and delaying the realisation of their investment in the company

In this article we outline four steps in our typical approach when asked to assist multiple shareholders in the sale of their shares (and therefore the company as a whole) where those shareholders have all agreed to the sale.

  1. PRELIMINARY CONSIDERATIONS - COMPANY CONSTITUTION AND SHAREHOLDERS AGREEMENT

When considering the sale of the company, it is important to be aware of relevant provisions in the company's constitution and any shareholder agreement in operation.

The constitution and any shareholders agreement will often contain provisions affecting the sale of the shares. For example, a shareholders agreement may contain rights of first refusal that require a vendor shareholder to offer its shares to the other shareholders before approaching third parties. Alternatively, there may be pre-emptive rights such that before a negotiated sale with a third party can proceed, the other shareholders have a right to match the third party's offer.

These sorts of provisions can be dealt with in a number of ways, including:

  • via a shareholders' resolution assenting to the sale of the shares, despite anything to the contrary in the shareholders agreement or constitution
  • via the termination or variation of the shareholders agreement (if appropriate), or
  • via a further agreement between the shareholders (see step 2 below)

The best approach to be taken will be dependent on a number of factors, including the provisions of the constitution and the shareholders agreement (if any) and on the number of vendor shareholders in question.

  1. EXIT DEED MAY HELP TO MINIMISE COSTS AND INCREASE COMPANY'S ATTRACTIVENESS AS AN INVESTMENT PROPOSAL

In the context of a multi-vendor share sale transaction, the costs to the purchaser and to each individual vendor shareholder can multiply if each shareholder:

  • participates in the negotiations with the prospective purchaser, and
  • considers and approves amendments to the transaction documents

The potential additional costs (and associated delay) are likely to be seen as unattractive to the prospective purchaser. Further, a prospective purchaser may factor in the increased expense into its purchase price calculations, resulting in a lower offer price.

Additionally, the engagement of lawyers and accountants by each vendor shareholder is expensive and unnecessarily duplicates work.

One way to avoid these issues is via the preparation and execution by the shareholders of an "exit deed".

Under a typical exit deed, all of the shareholders agree to appoint one person (or, in some cases, multiple people) to be their collective representative for the purposes of selling the company. The representative could be a director of the largest shareholder or someone who the shareholders agree has the best skill set to manage the transaction.

The shareholders may vest in the representative rights and powers to:

  • take control of, and responsibility for, the due diligence process
  • negotiate with the prospective purchaser, including as to the terms of the transaction document
  • instruct the lawyers acting on behalf of the shareholders, and
  • attend to and manage any pre-completion or post-completion conditions

Where the shareholders are motivated to sell, agreeing to and executing an exit deed is likely to maximise the attractiveness of the company as an investment proposition for a prospective purchaser as the prospective purchaser will take comfort from seeing that the vendor shareholders are organised and committed to the sale process.

  1. TRANSACTION DOCUMENT WARRANTIES AND INDEMNITIES

Where multiple shareholders are selling their shares, extra consideration must be given to the warranties and indemnities in the transaction document effecting the sale.

Generally speaking, the warranties and indemnities given by the vendors can be separated into two categories:

  1. collective warranties and indemnities
  2. individual warranties and indemnities

Collective warranties

Collective warranties are those which, in the circumstances, are reasonable or appropriate for the vendor shareholders to collectively provide to the purchaser. These most often pertain to the operations of the company itself (such as warranties that the company is not in breach of any contracts or that the company's operations are compliant with any regulatory requirements).

In the event of a breach of a collective warranty, the position that the purchaser would want to achieve is that the vendor shareholders are jointly and severally liable, meaning that each shareholder is potentially liable for the whole of the loss suffered by the purchaser arising from the breach. From the perspective of the vendor shareholders, this outcome can be disadvantageous and it can leave the shareholder with the "deepest pockets" exposed to the whole of the loss regardless of its percentage interest in the company. The shareholders can take care of this issue among themselves by entering into a "Sellers' Deed of Indemnity" (see step 4 below).

Individual warranties

In contrast to the collective warranties, individual warranties are those that are not appropriate for the vendor shareholders to provide collectively to the purchaser. Collective warranties pertain to matters specifically within the knowledge of the individual shareholders, such as ownership of the shares and the unencumbered status of the shares.

The indemnity for the individual warranties should leave only the individual shareholder who breaches the warranty liable to the purchaser for the breach, on the basis that the other shareholders should not be held liable for something outside their control or responsibility.

  1. SELLERS' DEED OF INDEMNITY

In addition to the separation of the collective and individual warranties in the transaction document, a further document called the Sellers' Deed of Indemnity can be prepared which operates:

  • to ensure that each vendor shareholder is only liable for a breach of a collective warranty to the extent of that shareholder's former proportionate shareholding in the company and can seek indemnity from all the other former shareholders where a claim in respect of a collective warranty is brought against them by the purchaser, and
  • to provide a procedure for the handling of claims brought against the shareholders, including as to the circulating of notice of any claims and of the payment of any settlement sums.
Andrew Komesaroff Christopher Langton
Corporate advisory
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Coleman Greig Lawyers
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Coleman Greig Lawyers
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions