SALE OF THE COMPANY - structure of the contract for the sale of the company

Posted by: 10. 7. 2024
Update: 4/7/2024

In this part of our series, we will introduce you to the basic structure of the contract for the sale of the company, on the basis of which it takes place to the transfer of a "company", whether the subject of the transfer is a share (share), a company, or individual assets. All these contracts will have similar structure and they will basically differ only in the provisions that are typical for that type of transfer.

We will explain the structure of the transfer agreement using an example share (share) transfer agreements, i.e. on the "share purchase agreement" or "SPA".

Of course, a more detailed analysis of the SPA will help you better understand the key elements of this document, especially from the position of the seller. Here is a more detailed look at the individual parts and aspects of the SPA:

Each SPA should consist of roughly the following parts:

1. Introductory Provision

Identification of parties: clear identification of seller and buyer, including legal form and seat.
Preamble: contains a definition of the reasons and circumstances under which the contracting parties conclude the contract, why they do so, what their goal is. These provisions usually do not establish any specific rights and obligations of the parties, but they can be of key importance in the event that a dispute arises between the parties regarding the interpretation of the contract.
Defi Nice: for the correct application of the individual provisions of the contract, it is advisable to precisely define each one concepts, which according to the contract are to be interpreted in one specific way. In this way, you define, for example, the name of the company/share that is the subject of the transfer, the entities making up the business group, specific assets that should be of key importance, etc. Terms should be defined with an introductory capital letter. Whether "agreement" or "agreement" was meant in a particular context can be of great importance in the event of a lawsuit. In one case, I once saved a client CZK 150.000.000 in this way.
Interpretation Provisions: specify how the individual contexts of the contract are to be interpreted, for example, when the singular should mean the plural, etc. However, be careful not to "weed out" the contract with too many definitions and interpretation provisions, it is always necessary to apply above all "peasant common sense", especially contracts from the pens of foreign law firms neglect this quite a bit and often contain "definitions of definitions". Although the contract is thick and you can probably charge more, it becomes quite confusing and annoying for the layman.

2. Subject of the contract

Object of the contract: a definition of what is being sold, including a specification of the shares or interests, their quantity and type. It is important that this information is specified as precisely as possible to avoid any misunderstandings.
The moment of transfer of rights: it is usually stated here at what moment the effects of the change in ownership of the object of the transfer occur.

3. Purchase price and payments

The amount of the purchase price: the agreed price for the shares, the method of its determination (fixed, variable based on the company's performance, etc.) Whenever the final amount of the purchase price is to depend on some fact that is to occur in the future (for example, the extension of a key contract for the company, the achievement of economic results), it is necessary to define the conditions absolutely exactly, based on the fulfillment of which the right to an additional payment of the purchase price arises.
Terms of payment: detailed schedule payments, including any advances, final payment and penalties for late payments.
Method of payment: often the purchase price is settled through a third party, independent of the seller and the buyer, an escrow agent (custody). In such a case, it is defined here what the conditions will be for the payment of the purchase price, when the money is returned to the buyer, etc. These conditions are then adopted by the escrow agent in the money management contract.

4. Warranties and representations of the seller

Importance: just as you have described, for example, the condition of the car you are buying, it is very desirable to describe the legal and factual state of the transferred company, so that the parties can assume that it has been sold properly. In other words, which facts will mean a "defect" of the object of the transfer and which rights of the buyer will arise from this (right to a discount from the purchase price, claim for damages or the possibility of withdrawal from the contract).
Basic guarantees: legal and factual ownership of the shares sold, absence of obligations or restrictions associated with the shares.
Extended Warranties: relate to the economic condition of the company, its business position, important contracts, employee relations, environmental and other regulatory matters.
Limitation of Warranties: definition of situations where warranties do not apply (e.g. changes caused by the buyer's decisions after taking control).
Warranty rights: agreement between the parties as to what rights the buyer will have in the event that the company is found not to be in the state it was declared to be in, i.e. if it suffers from any defects. In such a case, the buyer is usually entitled to a discount on the purchase price. It is often agreed that deviations up to a certain "trivial" amount will not mean a right to a discount, on the contrary, in case of exceeding a certain limit, the entire damage is repaired.
Warranty period: the period during which the buyer can exercise rights from defects after taking over the company is usually agreed for the period during which the "defect" can manifest itself, for example in the case of "defects" in connection with (non)fulfilment of tax obligations, the warranty period should be longer than the time during which the tax authority can initiate an audit to assess the tax and should be built if such an audit is initiated.

5. Preconditions of transfer

Suspension conditions: by them we mean the facts that must be fulfilled in order for the parties to be obliged to proceed with the settlement of the transaction. These conditions are typically the deposit of the purchase price into an escrow account, obtaining the approvals of the parent entity, permission for the merger of competitors by the Office for the Protection of Economic Competition, etc.
Transfer of Shares: this refers to the mechanism of transfer of ownership, including legal formalities such as the transfer of shares or registration of changes in the commercial register.
Safeguard clauses: specify conditions to protect the seller if there are changes in the purchase price based on newly discovered information. The seller is limited in certain negotiations between the signing of the SPA and its settlement so that there is no risk of a reduction in the value of the company. I experienced a case where the parties underestimated this during the purchase and the manager (the owner of the sold company) "managed" to withdraw about CZK 40.000.000 from the company through fictitious purchases of metallurgical material. Thanks to the good work of the law enforcement authorities at the time, all the drained assets were returned to the client, and the outstanding executive was given the opportunity to think for seven years whether this was a good way of managing the company during the transition period.

6. Post closing obligations

Non-competition: a typical post-closing obligation is an agreement between the parties that, for the agreed period, the seller will not be authorized to carry out business activities that would be in a competitive position with the company being sold. The buyer's logical interest is to be able to have the largest possible share of the relevant market with the newly acquired company, therefore he tries to limit the seller's competitive activities. Although it is a legitimate request in principle, beware of negotiating such restrictions that could be a restriction of economic competition.
Not dragging employees: similar to the above-mentioned non-competition ban is the ban on the transfer of employees, when the seller is forbidden for a certain period to offer and employ (key) employees of the company being sold, who may have know-how that may be valuable for the company. Again, watch out for the violation of the rules of economic competition.
Seller engagement commitment: in many cases, it is important for the buyer that the seller, who is a natural person and knows the operation of the company being sold in detail, remains in this company for some time and participates in the management of the company and its integration into the corporate structure of the buyer. In such a case, it is advisable to agree on the conditions under which this will happen, both financial conditions, but also further delimitation of competences, the period for which this obligation will be assumed, and

7. Final Provisions

Legal consequences of breach of contract: agreement on sanctions and remedies in case of non-fulfillment of the terms of the contract, agreement on the conditions under which one or the other party is entitled to withdraw from the SPA.
Řešení sporů: choice of jurisdiction and method of dispute resolution, such as arbitration or court proceedings. Both options (court or arbitration) have their pros and cons.

That, in short, is the basic content of the contract based on which the company is sold. In the next part, we will discuss in detail the system of guarantees and declarations, the correct understanding of which is crucial for the realization of the sale of the company.

Do you need advice or representation at sale of the company? Do you have any comments about our series? Contact us! We have many years of experience in selling companies!