Legal aspects when buying a business in Ireland
Legal aspects in M&A when buying an Irish companyLegal aspects are of paramount importance when buying a business. Your advisor needs to be up to date with the legal framework that applies to M&A transactions in Ireland. Here we mention some aspects that you need to consider when acquiring a company in Ireland. Ireland being a Common Law jurisdiction shares similar attributes to Australia, Canada, UK, US and other common law jurisdictions.
The vast majority of Businesses in Ireland are Limited Companies which are owned by their shareholders. Private limited companies in Ireland are either a single member company, whereby 1 person is the 100% shareholder or multi-member where by more than one person have shareholdings of various percentages. Company law in Ireland permits the use of a Holding Company Structure which is the most tax efficient method to acquire shares in a company. Once a deal has been agreed there are 2 documents which are essential to the closing process. The first one the Heads of Agreement is a broad outline of the deal in question. The second the Share Purchase Agreement is the contract for the transfer of the business.
The Heads of AgreementOnce a deal has been agreed with the parties involved a document called The Heads of Agreement will be drafted. Other titles for this document is Memorandum of Understanding or Head of Terms or Letter of Intent. As you can see there are a number of names for this document which at times are used interchangeably. The document itself is non-binding but nevertheless it should be drafted with care as it will become part of the legally binding Asset or Share Purchase Agreement. Therefore, ensuring all key terms and pertinent details are incorporated early avoids the requirement for renegotiation later.
A key point at this time is for the seller to give the buyer an exclusivity period to inspect the books and records of the business (Due Diligence). It should be noted that prospective buyer should be prepared to pay a non-refundable deposit at the Heads of Agreement stage. This is to ensure that a buyer remains committed to the deal and will weed out time wasters and rival companies trying to exact competitor advantage by accessing confidential files during the due diligence process.
Both parties at this juncture will have agreed a deal which will essentially be Price and Terms and other key points e.g. A Seller is selling a 100% shareholding in his company for €10m, A Buyer offers the €5m as follows €5m on contract signing, the balance payable in 2 equal instalments based on agreed revenue targets over a two year period, a further stipulation would be that the seller remains in the business for 2 years to ensure an orderly handover and that a non-compete clause is in force for 2 years. The buyer may also want to ensure that key staff are retained as part of the deal and this also will be in the Heads of Agreement.The document itself can run from a single page to multi pages depending on the circumstances of the transaction.
The Share Purchase Agreement.The Terms and conditions agreed in the Heads of Agreement become the essential components of the Share Purchase Agreement. The Share Purchase Agreement ("SPA") is the definitive agreement which finalises all terms and conditions relating to the purchase and sale of the shares of a company. Normally, drafted by the purchaser’s lawyers this document is an all-encompassing contract designed to protect the interests of the purchaser.
Typically it will have the following headings:
1. Definitions and interpretation
2. Type of sale
5. Escrow account
6. Completion accounts
7. Adjustment of consideration
8. Obligations on the parties
9. Restriction of vendors
11. Covenant in respect of tax
13. Confidentiality of information received
17. Governing law and jurisdiction
18. Schedule 1 Details of shares for sale
19. Schedule 2 Details of the company and any subsidiaries
20. Schedule 3 Details of property
21. Schedule 4 Warranties
As in most walks of life the legal stage can be contentious and it’s vital that both Vendor and Purchaser lawyers have a clear mandate and the SPA doesn’t become another negotiation stage. Lawyers should be engaged early in the Sale process and briefed accordingly. The majority of deals which don’t complete are as a result of the SPA whereby one party or another are not willingly to agree to certain terms and conditions.