For many business owners, discussions during the early stages of a sale or investment can feel informal and optimistic. With terms starting to take shape and negotiations progressing positively, there is often a shared sense of momentum and confidence that the deal is moving forward with ease.
However, once commercial discussions have progressed and the transaction enters the formal legal stage, the devil is in the detail. As a result, the pace of the transaction may begin to slow.
Whilst this stage can sometimes feel frustrating and time-consuming, there is good reason for careful drafting and thorough negotiation of the legal documents, particularly, the key document recording the terms of the sale: the share purchase agreement.
Lee Middleton, Senior Associate in the corporate and commercial team at Nalders LLP, says: ‘Care and diligence is required to ensure the share purchase agreement accurately reflects the commercial deal agreed and safeguards your position. A solicitor plays a central role in guiding the process, managing risk and helping ensure a smooth transaction through to completion.’
In this article, Lee explains how transactions typically move from informal agreement to negotiating the share purchase agreement.
Moving from commercial agreement to legal documentation
There is often a clear moment when a transaction moves from being a commercial discussion to a formal legal process. Recognising that moment is important. This may be when the structure of the deal and the price and payment terms have been agreed in principle, and the buyer’s funding arrangements are in place.
At this stage, the transaction is no longer simply exploratory, as time and money are being invested. Once professional advisers have been engaged, expectations begin to harden.
Ensuring that the outcome of the early discussions is confirmed in writing – in Heads of Terms – is crucial. So too is clarity around the legal structure and drafting responsibility. Without it, you can face:
- ambiguity over what has actually been agreed;
- delays caused by uncertainty as to who is preparing documentation;
- increased legal costs due to duplicated or unnecessary work; and
- risk that commercial assumptions are not properly recorded.
Early legal involvement helps to ensure that what has been agreed in principle can be translated into a clear and enforceable agreement.
In fact, Lee suggests business owners seek legal advice and assistance when they are ready to draw up Heads of Terms. A lack of clarity or inconsistency in the Heads of Terms can cause problems later on in the transaction.
Who prepares the share purchase agreement?
Generally, the buyer’s lawyers will prepare the first draft of the agreement, but this is not always the case.
What matters most is that responsibility for drafting is agreed at an early stage. Doing so avoids delay, manages expectations and ensures both sides can allocate resources appropriately.
Our corporate and commercial team regularly act for both buyers and sellers in share purchases and can advise you strategically on the most appropriate approach for your position.
From first draft to completion
Once responsibility for drafting is agreed, the transaction typically progresses through a series of structured stages.
Draft preparation and review of agreement
The first draft share purchase agreement will set out the core commercial and legal terms of the deal, including:
- the shares being sold;
- the purchase price and payment structure;
- warranties and indemnities;
- limitations of liability; and
- conditions to completion.
The buyer’s solicitors will then review and propose amendments. This stage often involves detailed negotiation and careful consideration of risk allocation.
Negotiation of key commercial and legal terms
Negotiation often focuses on:
- the scope of warranties;
- financial thresholds and caps;
- deferred consideration or earn-out arrangements;
- restrictive covenants; and
- tax provisions.
For business owners, this can feel intense. Our expert lawyers can guide you through the commercial objectives and the legal implications of each decision and concession.
Completion of the disclosure process
Alongside preparation and negotiation of the share purchase agreement, due diligence will be carried out.
Once due diligence is well-progressed and the share purchase agreement (and, in particular, the warranties) is taking shape, the seller will usually prepare a disclosure letter. This is a critical document in which the seller discloses matters against the warranties given in the agreement.
The disclosure process requires careful management. It involves:
- reviewing company records;
- identifying potential risks or historic issues; and
- ensuring disclosures are clear, specific and properly evidenced.
Done properly, disclosure can significantly reduce the seller’s post-completion exposure to risk. Our corporate lawyers can draft the disclosure letter to best protect your interests.
How we can help
Negotiating a share purchase agreement is vitally important for business owners, who may only sell or purchase a company once in their lifetime. Our corporate and commercial team provides clear, pragmatic advice at every stage of the process. We can assist with:
- advising at heads of terms stage;
- drafting and negotiating the share purchase agreement;
- managing the disclosure process; and
- coordinating due diligence responses.
We focus on protecting your commercial objectives whilst keeping the transaction proportionate and efficient.
From the initial handshake through to binding contract, careful legal guidance ensures that the deal you have worked hard to negotiate is properly documented and enforceable.
For an informal conversation about a proposed sale or acquisition, please contact Lee Middleton in the corporate and commercial team on 01872 241414 or email ldm@nalders.co.uk. Nalders LLP has seven offices in Cornwall, with Lee based in the Truro office.
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.