Considering acquiring a local business and not sure of the process? Several things can have a significant impact on the timing and costs of the transaction, high among them is the method of acquiring the business. The structure of the businesses, partnerships versus sole traders versus incorporated companies, can also impact the method of acquisition. For the purposes of this article, we focus on the acquisition of businesses carried on through an incorporated company (referred to in this article as a target).
The methods of acquisitions most commonly used in T&T include share purchases and asset purchases. Other available structures which can bring strategic advantages include an acquisition through a subscription for shares, an acquisition through an amalgamation under our Companies Act (referred to as an amalgamation acquisition) and take-over bids. In this article, we focus on share purchases and aim to provide an overview of the typical process and considerations when negotiating and entering into a share purchase transaction.
The Process of a Share Purchase
Settling the Key Commercial Terms
In a share purchase, a buyer purchases the shares of a target from one or more selling shareholders. The typical process of a share purchase begins with the negotiation of key commercial terms relating to the transaction. Once the key commercial terms are established, the parties may enter into a letter of intent in which such terms are documented, and which may or may not be legally binding on the parties. At such a preliminary stage, the Letter of Intent is likely to be subject to key certain conditions which will either permit the transaction to proceed to conclusion of enable parties to walk away. Alternatively, and often only if the target is very well known to the purchaser, the parties may proceed directly into the negotiation and entry into of a detailed share purchase agreement providing for the key commercial terms of the deal and the timing and mechanics of completion.
One key condition to the Letter of Intent is typically the satisfactory completion of due diligence on the target.
Due diligence is usually carried out by the buyer and its advisors and focusses on legal and financial matters. The objective in carrying out due diligence is to identify:
- the ability of the seller to sell the shares and give ‘good title’ to the shares to the buyer. For example, verifying that the seller’s shares are not subject to any liens or that there are no provisions in the target’s incorporation documents restricting the seller’s ability to sell or in the target’s existing material contracts restricting a change of control.
- the ability of the buyer to carry-on the business of the target following completion of the acquisition without any disruption. For example, a buyer should consider the target’s material business relationships (with its customers, suppliers and other business partners) and verify that any contractual arrangements with such third parties would not terminate (or have cause to materially change) as a result of the sale of the seller’s shares to the buyer.
- any areas in which a buyer might be exposed to unforeseen costs or liabilities following the completion of the acquisition. For example, any unpaid taxes for any period prior to the proposed completion of the acquisition.
Due diligence can either be conducted:
- prior to the entry into the share purchase agreement and sometimes following the entry into a Letter of Intent (in which case it would be typical for the shares to actually change hands simultaneously with the signing of the share purchase agreement); or
- the share purchase agreement may contemplate an agreed timeframe following the signing date during which the buyer can carry-out its due diligence on the target (in which case the transfer of the shares would usually takes place after such timeframe).
Common terms of a share purchase agreement
In most share purchase transactions where the buyer has no prior involvement in the management or ownership of the target, the share purchase will likely involve the negotiation and agreement of the following common terms of a share purchase agreement:
- representations and warranties or statements of fact by the selling shareholders relating to the good standing, assets, liabilities and trading activity of the target. These are primarily aimed at giving the buyer comfort surrounding (a) the historical financials and performance of the target, including whether there are any significant liabilities which the buyer would acquire as a result of the share purchase; and (b) the future prospects of the target’s business, including whether the share purchase could likely result in the termination of any of the target’s material business relationships. A buyer will typically seek to include extensive, broad representations and warranties relating to the target and its affairs while a seller will be concerned to limit their breadth and scope so as to minimize circumstances in which a seller might be held to have misstated some fact relating to the target.
- indemnities or undertakings by the selling shareholders to reimburse the buyer or the target for certain prescribed costs. The terms of the share purchase will usually require the selling shareholder(s) to commit to reimburse the buyer or the target for any unpaid taxes which accrued for a period prior to the completion of the acquisition and for any losses which the buyer or the target might incur as a result of (for example) a representation or warranty given by the selling shareholder(s) being untrue. A buyer will seek to include indemnities which are unlimited both in terms of quantum and timeframe within which an indemnity claim might be made by the buyer. A seller on the other hand will seek to impose as low of a ceiling as possible on the amount for which he may be liable if an indemnity claim arises and impose a time limit (usually a certain period of time following completion) on when claims might be validly brought by the buyer.
- conditions precedent (conditions of sale which are required to be completed by the target, the buyer or the selling shareholder(s) prior to the completion of the share purchase). Conditions precedent are typically intended to be for the benefit and protection of the buyer. For example, a condition precedent may be that any regulatory approvals or consents required for the acquisition must be obtained prior to completion of the purchase; that any significant debt of the target must be settled prior to completion; or that commitments from material business partners to continue dealing with the target following completion are obtained.
Common approvals and consents impacting a share purchase
Despite satisfactory completion of due diligence and a meeting of the minds on key commercial terms one significant factor which could frustrate successful conclusion of share purchase transaction is the absence of approvals or consents required for completion. Accordingly, wherever applicable, the obtaining of required approvals or consents would typically be one of the conditions precedent included in a share purchase agreement.
Common approvals or consents include:
- consents from lenders: where the target has existing financing, particularly secured financing, it would be typical for the terms of such financing to require that the target not permit a change in its control without the prior consent of the lender(s).
- consents from third parties to material contracts: as mentioned above, the target’s business may rely upon certain material business relationships. Where these business relationships are recorded in the form of a contract, it would be important for a buyer to review the contract to verify whether the contract includes a restriction on any change of control of the target. If so, the prior consent of the counterparty to the proposed acquisition will likely be required.
- approvals from regulatory bodies: depending on various factors the acquisition might require the prior approval from one or more regulatory bodies. Typical regulatory approvals in an acquisition transaction include:
- approval of the Trinidad and Tobago Fair Trading Commission (TTFTC): where the combined value of the business of the target and the buyer is equal to or exceeds TT$50Million and either the target or the buyer carries on business in Trinidad and Tobago, the approval of the TTFTC will likely be required under the Fair Trading Act Chap 81:13.
- approval of the Central Bank of Trinidad and Tobago, Trinidad and Tobago Securities and Exchange Authority or Telecommunications Authority of Trinidad and Tobago: where the buyer or the target is licensed under the Financial Institutions Act, the Securities Act, the Insurance Act or the Telecommunications Act, it is possible and likely that approval from the respective regulators will be required as a pre-requisite to the completion of the acquisition.
- approval of the Ministry of Finance: in circumstances where the target is a listed company (i.e., the target’s shares are listed on the Trinidad and Tobago Stock Exchange (TTSE)) and the acquisition will result in more than 30% of the target’s issued shares being held by foreign investors (i.e., non-CARICOM individuals or companies controlled by non-CARICOM individuals), a foreign investment licence will be required from the Ministry of Finance under the Foreign Investment Act prior to completion of the acquisition. If the target is not a listed company and the buyer is a foreign investor, no licence will be required but the buyer will be required to complete and submit a foreign investment notice to the Ministry. In both instances where the buyer is a foreign investor, the purchase price for the shares will likely be required to be paid in an internationally traded currency (such as US dollars) unless the buyer is exempt from such obligation under the Foreign Investment Act.
The costs of a share purchase transaction typically include the costs of the buyer’s legal and financial advisors and the cost of stamp duty payable on the transfer of shares.
Where the target’s shares are not listed on the TTSE, stamp duty is chargeable at the rate of $5.00 per Thousand of the higher of the consideration and the market value of the shares. Importantly, the Board of Inland Revenue (BIR) assesses the value of shares by having reference to an up to date valuation of the shares prepared by a chartered accountant and the recent management and/or audited financial statements of the target. In circumstances where the target owns real property, the BIR is also likely to require an up to date valuation of all such real property to be submitted for its consideration in assessing the value of the shares. These deliverables can add to a buyer’s costs of a transaction if they are not supplied by the seller.
Where the target is a listed company, stamp duty will be payable on any share transfer at the rate of 5% of the market value of the transaction (by reference to the market price of the shares on the TTSE).
This article focuses on some of the common matters to be considered in a share purchase transaction involving a target located in Trinidad and Tobago and is by no means comprehensive. In any acquisition (however structured) there will be nuances depending on the nature of the target’s business, the terms of the acquisition and other factors impacting the parties. Advice from legal counsel and financial advisors is critical in any such deal and should ideally be sought before pen is put to paper.
Disclaimer: This Document Provides General Guidance Only And Nothing In This Document Constitutes Legal Advice. Should You Require Specific Assistance, Please Contact Your Attorney-At-Law.