Five simple legal advices when buying and/or selling a company

1.- Carry out a process of Due Diligence prior to the sale and purchase

It is advisable and even necessary to carry out what is called a process of Due Diligence, i.e., a review of the sale and purchase target company, not only from a technical, commercial and financial point of view but also from a legal-tax point of view with the purpose of not only of detecting potential “risks” but also possible “benefits” or synergies to be gained by the purchaser party, and that ultimately will serve both to determine the interest in carrying out the transaction, set the price and delimit the liability regime assumed by the parties.

2.- Determine the object of what is purchased or sold

Although it seems obvious, it is not always clear at the beginning of a transaction what is going to be purchased or sold. Therefore, it is advisable to be clear from the outset what will be the object of purchase and sale. I.e., if what you buy or sell will be shares/quotas or, on the contrary, will be assets assuming, if any, liabilities.

In the first case, who sells is the partner and in the second case who sells is the company.

The choice between one or other depends on several factors. Among them, focusing solely on purely legal aspects, what will determine the course of action will depend on the issues such as liability, taxation, licensing or administrative permissions, industrial property, etc

3.- Secure payment / collection Price

It is common in these types of transactions that all or part of the price is deferred to a later period than that in which the ownership of the company is transmitted. Therefore, it is of vital importance to avoid future problems securing the payment / collect price, for both the seller, who wants to be sure that the agreed price will be collected by him/her and the purchaser, who wants no one to disturb him/her in the peaceful possession of the purchased object.

There are different formulas that can be used for it, from the granting of bank guarantees, escrow account, etc.

4.- Specify the scope of liability of each of the parties

Both our Civil Code and Commercial Code do not contain an explicit provision for the purchase and sale of companies, having to apply the general rules governing the purchase and sale agreement. In this particular, it must be taken into account that under Spanish law the seller is liable against the purchaser for compensation for eviction (ie. in the case that the purchaser is deprived of the thing bought by a court sentence because a third party has a better right to his/her claim in keeping it) and for latent defects (ie. defects that are not perceptible to the eye at the time of its acquisition).

As this regulation does not adequately satisfy any contingencies that may arrise in a purchase and sale of companies, it is usual in this type of transaction that the parties agree to a regime of liability ad hoc that varies depending on whether you purchase or sell all or part of a company, if there are one or more sellers, etc. and it has to be establish the quantitative scope (ie. unlimited or limited liability), temporary (ie. how long the liability is) and qualitative (ie. what the contingency requirements are to take place liability).

5.- Establish an ordered transitional regime

Any change generates resistance. The change  ownership of a company is no stranger to such resistance that can arrise, among others, workers, customers and suppliers of both the purchaser party and the seller party.

Therefore, to minimize such resistance, there should be a system of orderly transition to allow the purchaser to control the company and the seller to leave the company in a “non-traumatic” way to culminate, ultimately, with the success of the transaction.

For this, there are formulas since the selling party stays in the company for a limited time until the transition period ends, obligations of mutual collaboration between the parties, etc.


May 2016
© 2016 José Luis Vecilla Camazón. All rights reserved

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