Share Purchase Agreement Disputes
Disputes can arise between purchasers and sellers of a company following completion of the transaction. These disputes can relate to completion accounts.
Completion accounts are accounts of the company that detail its assets and liabilities at the date of completion. If a share purchase agreement contains a completion accounts mechanism, then the actual purchase price paid by a purchaser is calculated in accordance with the assets and liabilities on the date of completion, rather than a pre-determined value.
Disputes can arise between purchasers and sellers of a company following completion of the transaction. These disputes can relate to earn-out clauses.
Share purchase agreements often include earn-out clauses. They are commonly used when a shareholder of the company being sold is also a director and they are to continue working for the company, either as an employee or a director. An earn-out clause incentivises the smooth running of the purchased company following completion because the purchase price is assessed by reference to the profits of the company after completion.
Disputes can arise between purchasers and sellers of a company following completion of the transaction. These disputes can relate to a breach of warranty.
Sellers of a company will often agree to a number of warranties in relation to the purchased company in a share purchase agreement. For example, a warranty could be that the company is not currently subject to any litigation. If it is, the sellers must disclose this in a disclosure letter. By doing so, the purchasers cannot argue that they were unaware of this fact.
Disputes can arise when a warranty is untrue and the sellers have not made a specific disclosure in relation to it.
Good leaver/bad leaver
The notion of the ‘good leaver’ and the ‘bad leaver’ are mechanisms that are commonly included in shareholders’ agreements. Disputes can arise over the classification of an exiting shareholder as a good leaver or a bad leaver.
A good leaver clause provides that a shareholder who leaves for reasons such as death, retirement or illness, is classified as a good leaver. They are then, upon exit, entitled to be paid the current market value for their shares.
A bad leaver is the opposite. These are shareholders that leave because they simply choose to, within a defined period, or because they have breached their employment contract or committed gross misconduct. Upon exit, bad leavers would normally only get the nominal value for their shares.
In many disputes regarding share purchase agreements, an expert determination is used whereby an expert is brought in to assess the dispute and provide a resolution. This resolution can be binding on the parties.
Expert determinations can be used to provide an outcome for disputes about the final price paid by the purchasers following production of the completion accounts or earn-out accounts. They could also be used to determine a more specific claim, depending on how the share purchase agreement has been drafted. Breaches of warranties tend to be left for the courts to determine.
A significant advantage of the expert determination process is that it can resolve the dispute without the time and cost of pursuing litigation. Specific expert determination clauses will often be drafted into the share purchase agreement so it is important to seek specialist legal advice on this aspect.