Friday, 24 March 2017

SPA Series Part 13: Corporate and Share matters, Capitalisation

Now we focus on corporate and stock matters which cover several issues such as corporate organizations, capitalisation, title to shares and required corporate decisions. 

Some of these are easy like the one stating that the seller is a corporation duly organised and existing and having necessary corporate power and authority. In case of shares, capitalisation is similarly one of the key issues. This concept covers issues like number of shares, the requirement that these are validly issued, outstanding and fully paid. Similarly, these warranties contain statements that in the closing good and valid title to the shares is transferred without any liens or encumbrances and that there are no convertible loans, options or other special rights entitling to shares. All these serve one purpose only, to ensure that the buyer ends up having full hundred percent ownership in the company. Sometimes there might be warranties saying, for example that "...liens or encumbrances except for lien of the bank released upon closing...". This warranty requires that the seller has received from his or her bank a statement to this effect.

One issue to keep in mind is that options may require a separate treatment. These might be converted into shares as a condition precedent to the closing or these could be purchased directly upon closing in which case the purchase price would be lowered respectively. Both methods are being used and even if the conversion route is selected it might be advisable to have double security to ensure that if there remains any unconverted option rights at the closing which can be redeemed by the buyer (by waiving condition precedent if applicable), then the purchase price will be adjusted respectively. There some tax aspects or differences between these models that need to be taken into account in the tax sections of the agreement.

Also if the seller fails to disclose option rights the buyer will have an indemnification claim against the seller, but effectively the option holder may have the right to claim conversion of the option rights (if possible under the terms) and there might be a minority that might be annoying, but gladly the redemption process under the Chapter 18 of the Companies Act will normally help. If there are additional concerns in this respect that there might be more undisclosed option rights (and Chapter 18 could not necessarily help), then structuring the deal as a merger might be one solution worth investigating further. In asset deals these kind of share matters and capitalisations are not truly relevant, but some kind of statement might be good to have any ways if not for other purpose at least to ensure that the persons with whom one has been dealing with have significant ownership in the company.

In cross-border context one issue that often raises is qualification to do business. This is do to the fact that in many cases such decision is delayed until it is mandatory. This is a kind of business decision, which may lead to a potential tax liability (and if massive, of course annoying to the purchaser). Another risk that might raise and that the purchases wishes to avoid is that a material agreement is rendered unenforceable. There are solutions to these warranties that are on the "middle-ground" like one stating that "the company is qualified in all jurisdictions were it owns or leases property or has personnel". This gives some kind of "materiality" element to the representation. Another option might be to say that the company may qualify in all jurisdiction if needed without significant loss or expense. Material agreements can also be discussed separately from this qualification perspective and it could be stated for example that failure to qualify does not affect enforceability which would cover the other aspect mentioned concerning these qualifications.

Corporate decisions are the final issue to be mentioned in this posting and naturally there should be a statement that all necessary corporate approvals have been give. Normally these kind of "...subject to the approval of the Board of Directors..." qualifications should not be accepted as these give the other party an option to walk-away.

Next time we will focus on my favourite representation regarding financial statements so stay tuned and have a pleasant weekend in the meanwhile!