Share sale - the main types of consideration
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From the sellerís perspective, procuring immediate cash
payment for the agreed value of the shares will normally be the most
favourable outcome. In a share sale transaction, this method of
consideration indubitably circumvents the uncertainties and possible
credit risk pertaining to other payment structures. Moreover, providing
the seller with a fixed cash sum at completion can also be easily
documented in the share purchase agreement. The consideration clause
could often be restricted to the following:
The agreed amount that the purchaser must pay
- The purchase price must be paid in full on completion.
- The manner of payment e.g. electronic transfer or bankerís
- In the event that there are multiple sellers, how the
consideration will be allocated between them.
Of course the purchaser must confirm that it has the
requisite funds to meet its payment obligations. It is unlikely that UK
sellers will agree to proceed to exchange if completion will be
dependent on the purchaser acquiring finance from a third party.
Conversely, there are transactions where corporate
buyers allot and issue shares to the seller in order to satisfy the
consideration requirements (otherwise known as non-cash consideration).
One should note however, that this approach is usually taken when the
purchaserís shares are publicly traded e.g. on the Main Market of the
London Stock Exchange or on AIM.
An alternative (and fairly common) form of non-cash
consideration entails the purchaser issuing loan notes to the seller. A
loan note can be construed as a type of financial instrument that
corroborates the existence of a debt. The note will comprise a promise
by the issuer to repay any outstanding amount to the noteholder. Hence,
in a corporate acquisition a loan note would in essence, enable the
purchaser to borrow part of the purchase price from the seller.
Written by Mekael Rahman
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