The buyer of the shares of a company runs a serious risk: he inherits all of the liabilities of the business. To protect the buyer, his solicitor will expect the seller to give comprehensive warranties and indemnities.
But a promise to pay is only as good as the covenant of the seller. The seller might leave the country or he may fritter away the sale proceeds or give them away to his family. A man of straw is not worth suing.
The well-advised buyer may well go one step further and require that a part of the purchase price is held back to meet any warranty and indemnity claims.
What though of the risks for you as seller? You may only sell your company once. What if the buyer goes bust and fails to pay you the retention?
The half-way house in this situation is for the retention to be placed in an escrow bank account: this might be an account in the buyer’s solicitor’s name or in the joint name of the solicitors acting for the buyer and the seller. This was the compromise agreed between buyer and seller that came to the courts in the recent case of Bir Holdings -v- Mehta.
The seller’s solicitors though were not up to the job. The Share Purchase Agreement did not require the buyer to substantiate any claims and contained no mechanism for determining disputes over claims for payment from the retention account.
Six months after the sale went through, the buyer made claims for breach of warranties and indemnities. The whole of the retention, £250,000, was paid out by the buyer’s solicitors to their client. The seller was not happy. The seller’s solicitors were perhaps dusting off their insurance policy and worrying about a potential negligence claim. The seller contested the unconditional right of the buyer to withdraw money from the escrow account.
Before the court the seller argued that a term should be implied into the Share Purchase Agreement: claims he contended had to be accurately calculated and supported by the facts. It may be observed that absent such an implied term the whole notion of putting the retention into a retention account was a nonsense.
The seller lost the legal action. The court decided it had no power to improve the bargain the buyer and seller had concluded. Here the terms provided for a buyer-friendly position: ludicrously so it might be thought. But that was what the seller had agreed. The buyer did not have to prove the claims: he could just ask his solicitor to withdraw money from the retention account.
The moral of this story?
When selling your business make sure you use a solicitor experienced in this area of work.
The pitfalls are many and varied. You may only have one chance to sell your business for a good price. Make sure you have a solicitor on your side who makes sure your rights are protected.
