Background of the transaction – Share Sale and Restructuring
Our client is involved in a corporate transaction where he is selling his shares in a company. The sale is also part of a restructuring process. The shares are being sold to a newly incorporated holding company which has been set up by the remaining shareholders. This new company will be owned by the current minority shareholders of the original company, along with an additional employee from another company within the group.
The total consideration for the sale of the shares is just over £8.2m. This amount is structured to be paid in two parts: an initial cash payment of just over £1m upon completion, and the remaining amount as deferred consideration. The deferred consideration is to be paid flexibly over a period of time. The length of the deferred consideration period and the amount of instalments/deferred payments depends on how the company is performing financially.
Deferred Consideration: Structure, Flexibility and protecting the client’s interests
The deferred payments are calculated based on 65% of the profits generated by the trading companies, plus 65% of any surplus cash that is available for further distribution. During the period that the deferred consideration remains outstanding, the new holding company will not receive dividends from its shareholding in the trading companies. However, to ensure that the existing shareholders can participate in profits of the company whilst the deferred consideration is still outstanding, it has been agreed that a dividend can be declared to the shareholders with dividend rights but only from the pool of 6% of the profits that the newly incorporated company makes.
Protecting Our Client’s Interests in the Deferred Consideration Agreement
Nevertheless, to protect our client’s interests in the transaction, the following provisions (among others) are being incorporated into the transactional documents:
- Our client is entering into the Shareholders’ Agreement with the other individual shareholders and the newly incorporated company and its subsidiary creating an obligation on the parties to consult our client before making fundamental decisions that may affect the company’s or the subsidiary’s operations and profitability;
- Each director of the company is entering into a director’s service agreement which clearly outlines their salary and bonus entitlements providing further clarity in terms of the company’s expenditure;
- Our client is directly involved in the account preparation process to be carried out quarterly enabling him to understand exactly the financial performance of the company and to determine the deferred payment due to him in each quarter; and
- The main share purchase agreement contains certain loan provisions enabling our client to demand full payment that is outstanding to him in the event of default.
The deferred consideration structure provides flexibility whilst protecting our client’s commercial interest in the company during the period the deferred consideration is outstanding.
Strategic use of Deferred Consideration Provisions
This transaction highlights the strategic use of deferred consideration provisions in transactional documents in corporate restructuring, allowing for flexibility in payment while maintaining stakeholder interests. The legal framework ensures that all parties are aware of their rights and obligations, providing a clear path following the completion of the transaction.
How We Can Assist: Expert Guidance for Your Exit Strategy
Navigating the complexities of deferred consideration and share buyback agreements can be challenging, but our expert team is here to guide you every step of the way.
Whether you’re looking to secure a smooth exit strategy, facilitate a business transition, or implement a share buyback arrangement, we have the experience and knowledge to tailor a solution that works for you.
With a proven track record in structuring agreements that protect your interests and ensure compliance, we’ll provide clear advice and practical support to achieve your goals. Contact us today by completing our enquiry form or calling 01244 312306 to discuss how we can help turn your vision into reality.
