Last updated on March 21st, 2022 at 09:09 am
We recently assisted the selling shareholders of the cryptocurrency group LAB577 in the sale of the entire issued share capital to BCB Group, a cryptocurrency trading and payments firm primarily servicing financial institutions. LAB577 is a blockchain and digital assets shop which was originally launched by a group of former NatWest bank software engineers.
LAB577 first contacted us in 2018 and we were subsequently instructed to prepare a shareholder’s agreement on behalf of the company. LAB577 quickly grew and last year they contacted The Jonathan Lea Network requesting initial advice on the appropriate group structure in advance of a proposed sale, with particular attention paid to the possible UK tax implications arising from the sale of part of LAB577’s business rather than the whole group.
In advance of any company sale, we always recommend the company seek tax structuring advice. If the deal or group is structured appropriately prior to completion of the transaction, the selling shareholders can mitigate tax leakage that will outweigh the expense of any initial structuring advice.
LAB577 liaised with BCB Group to produce the heads of terms, which precedes the share purchase agreement (“SPA”). The heads of terms sets out the key terms between the parties of a proposed transaction or arrangement. The benefit of a heads of terms is it enables the parties to demonstrate intent to transact with the counter party i.e. based on the main commercial terms. Those main commercial terms will still be subject to a formal contract, to that end the heads of terms do not legally bind the parties to complete the deal nor do they bind the parties to complete on the stipulated terms. The heads of terms can also include transaction time frames or deadlines as well as binding clauses relating to confidentiality, costs and governing law / jurisdiction.
Once the heads of terms were drafted and agreed, the parties then engaged in the due diligence exercise. Commonly the buyers will provide the sellers with a questionnaire, requesting responses and relevant documentation / information pertaining to the target. This enables the buyers to conduct an in-depth investigation and analysis into the various facets of the target such as its structure, employees, liabilities, material contracts, finances, assets etc.
Once the due diligence exercise was performed to the buyer’s satisfaction, BCB Group’s solicitors, as is customary, produced the first draft of the SPA. An SPA is the principal transaction document in a private share acquisition. Entered into between the buyers and sellers of a target company’s shares, the sellers agree to sell a specified amount of shares (usually the target’s entire issued share capital) to the buyers for a specified purchase price. The SPA will, among other things:
- document the terms of the transaction;
- detail how the purchase price is calculated, which can be comprised of cash payments, consideration shares in the buying entity and deferred and earnout payments, to name a few;
- specify the mechanics of completion and the documentation required to be delivered by parties on completion; and
- allocate transaction liability, risk and protections by operation of indemnities, warranties, covenants and liability clauses.
The buyers will acquire the target subject to the principle of caveat emptor (‘let the buyer beware’), as such the buyers, in search of protections will seek to rely on extensive warranties and some indemnities. When undertaking the work for LAB577, it was imperative that the warranties (which consist of the sellers providing several statements and assurances relating to aspects of the target), were worked through. We will often walk through the individual warranties with the sellers, to ensure that they understand the subject and scope of the warranty, to determine whether the sellers are indeed able to provide each warranty and / or whether any qualification to the warranties are necessary.
As in LAB577’s case, the SPA went through a few rounds of negotiations and iterations (generally the warranties are the subject of the heaviest negotiations). We were able to capitalise on our expertise and experience, directing our clients to the salient points of the SPA and remain commercially focused, rather than wrangling over the comparatively trivial matters of SPA.
We also assisted the sellers in producing a disclosure letter in respect of the warranties, in which the sellers made several general disclosures and expressly disclosed against specific warranties. The disclosure letter is the sellers first line of defence when a warranty is called into question by the buyers. If a disclosure of sufficient detail has been made, then the buyers are unlikely to have a claim for breach of contract in respect of that warranty, as the buyers were made aware of the exception to that warranty.
Documents included in a share purchase transaction which are either part of the main agreement or sometimes referred to in it (but separate), are known as ancillaries. We assisted LAB577 in drafting the stock transfer forms for the target shares and all other relevant ancillaries that were required to be delivered at completion e.g. board minutes, shareholder resolutions, resignation letters, share certificates etc.
Once all the documents had been drawn up, we assisted with the completion of the deal in accordance with the SPA’s completion mechanics. We managed the receipt of the purchase price, with the buyers transferring the relevant funds to our client account, funds which were then held to order until all parties had signed their respective documents. Upon confirmation that all the signatures had been gathered, we then remitted the funds to the selling shareholders.
Whether you are looking to buy or sell a business / shareholding, we would be more than happy to advise you on the transaction regardless of the perceived complexity. We will steer the parties with a commercially focused approach ensuring that the transaction is dealt with expeditiously, effectively and diligently.