Investment in, or the acquisition of, another business may be part of your business growth strategy; especially if you operate in the same market or supply chain. Acquiring a slice of the pie (or the whole pie!) through a purchase of shares is one way to achieve this.
Whether you are contemplating a partial investment or an outright purchase of a business, similar considerations apply.
‘There are a combination of commercial and personal factors which one has to be aware of when investing in a business through shares,’ comments Lee Middleton, a commercial solicitor with Nalders in Truro. ‘Careful analysis of the target business is critical, as is ensuring the required documentation is correctly completed. Our mantra is always to research, review and risk assess.’
Commercial considerations
There are several commercial decisions which will need to be explored with your solicitor. Here are some key examples:
- Percentage of shares. It may sound obvious but the percentage of shareholding you will take in the target business will have consequences for the amount of risk and reward you sign up for. The greater the shareholding, the greater degree of influence you are likely to have, not to mention potentially greater returns on your investment. Careful consideration is required to ensure you will be getting what you are expecting in return for your investment and, that this represents bang for your buck.
- Types of shares. Investigation into the corporate structure will reveal the types of shares already in existence and the rights attaching to those shares – it is important to check whether the particular shares have the right to vote and, receive dividends, for example.
- Rights and restrictions. A diligent read through of the existing Articles of Association and any Shareholder Agreement will highlight any notable rights or restrictions that may impact your investment. It is essential to consider these documents carefully – their content could determine matters of critical importance, such as whether you are permitted to sell your shares; whether you could be forced to sell your shares; and, how shares would be valued, if they are being sold. Before investing your money in shares, you need to understand the rights you will have, or not have, in relation to those shares.
Just from the few examples above, it is clear that reading the small print and having a clear vision of your investment goals and risk appetite will be key in navigating the purchase process successfully. A thorough due diligence exercise is a key part of the process.
Personal considerations
Whether your investment is made as an individual or you are investing through your company, there are some generic issues to look out for, including:
- Conflict of interest. There may be provisions in the shareholder agreement requiring shareholders to warrant there are no conflicts of interest. While on the face of it, you may think there are no conflicts, detailed due diligence may reveal otherwise.
- Tax position. Checking your tax position with a tax specialist is strongly advised for any investment. It is better to be forewarned than not – especially if it transpires that a personal investment may take you into a higher tax bracket, or if this investment through your business will not deliver the tax advantages you anticipated.
Documentation
Prior to any documentation being completed, asking the right questions, knowing where to look for the answers and spotting any anomalies through the due diligence process will be key so that you go into the share purchase as fully informed as possible.
Following this, any share purchase will typically require entry into a share sale agreement, a Shareholder Agreement and, in some instances, director service agreements and amendments to existing articles of association. An experienced team of lawyers and accountants will be critical to ensuring all the formalities are correctly completed and on a timely basis too.
How we can help
From dedicated due diligence to filings with Companies House, we have a strong team of experts across corporate, commercial and financing which will allow us to deliver streamlined, comprehensive advice to take you from start to finish of a successful share purchase.
For an informal discussion, please contact Lee Middleton in the corporate and commercial team on 01872 241414 or email ldm@nalders.co.uk. Nalders has offices in Truro, St Austell, Helston, Penzance, Falmouth, Camborne and Newquay.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.