64 corporate finance
Share purchase agreements – avoid the embarrassment
When a seller seeks to sell shares in their business, it is sometimes desirous for them to include an anti-embarrassment clause within the share purchase agreement, writes Oliver Kelly, corporate partner, Pitmans LLP
After completion of the transaction, the seller will want to ensure that they are not ‘embarrassed’ in the event that the buyer subsequently sells the shares (or the business or assets) in the target at a higher price shortly after completion.
An anti-embarrassment clause within the share purchase agreement provides the seller with contractual protection against the possibility of this event occurring and is often appropriate even if the seller does not expect an onward sale by the buyer. Such a clause provides that the original purchase price for the target is recalculated to take into account any gain the buyer obtains from an onward sale.
It is advantageous to use an anti- embarrassment clause where the value of the target is uncertain. Fluctuating market prices can tempt a buyer to seize the opportunity of selling the target on shortly after the completion of the initial sale. However, this is not the only instance of uncertainty in the value of the target. Where a business has not been fully marketed to other purchasers or has been marketed for a short period of time only (for example a sale by an administrator or sales by corporates to a management team on favourable terms) there is a risk that the target has been undervalued and the buyer may ‘embarrass’ the seller by acquiring an uplift in an onward sale.
Whilst there are key elements to an anti-embarrassment clause, the actual drafting of the anti- embarrassment clause and how extensive it is will differ according to the bargaining powers of the parties and the context.
The events which trigger a recalculation of the purchase price under such a clause are the disposal (a substantial disposal or series of disposals should also be included) of the business, assets or shares of the company or listing of the company.
businessmag.co.uk
A clause obligating the buyer to notify the seller of any of the triggering events occurring should be included.
These events trigger the recalculation only if they occur within the protection period, which is usually drafted to be between six months and three years after the initial transaction completed. The length of this protection period will undoubtedly be an issue which is negotiated back and forth between the parties as it is a significant commercial decision. A solution can sometimes be a reducing amount over the period of the embarrassment period. It is advisable to include a clause that extends the protection period where the buyer has made an arrangement during this period to complete what would have been a triggering event after the protection period.
An anti-embarrassment clause will need to set out how the recalculation of the purchase price operates in order to provide the seller with the uplift in value. This uplift is often a percentage of the uplift the buyer obtained upon selling the target. Despite the ‘embarrassment’ caused to the seller by the onward sale, the rationale is not for the seller to be paid all of the proceeds of this second sale. What percentage is fixed is a matter for negotiation between the parties. Where there is a disagreement about the calculation to be paid, the anti-embarrassment clause should provide for an expert to determine the correct procedure.
Whilst an anti-embarrassment clause is a sage provision to include within the agreement, a prudent seller will wish to prevent the buyer evading their protection from ‘embarrassment’. There are a number of ways in which added protection can be provided for, including a warranty from the buyer confirming they are not considering a sale of the target during the protection
THE BUSINESS MAGAZINE – THAMES VALLEY – JUNE 2016
period and undertakings from the buyer confirming they will not attempt to avoid the protection or arrange a triggering event during the protection period to be completed after the expiry of the protection period.
Notwithstanding the contractual protection provided by inserting an anti-embarrassment clause into a share purchase agreement, it may be worth the seller considering the alternatives to this clause which is for the seller to retain an interest in the target following completion of the transaction or to secure a charge over the shares for any sums payable under such provision.
Clearly a prudent buyer will find the prospect of such a provision unappealing, particularly where they feel that the enhanced value has been earnt and delivered by them. For that reason anti-embarrassment clauses are not in frequent use.
Details: Oliver Kelly 023-8083-1902
pitmans.com
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