Français
A letter of intent is a document that sets out the author’s intentions with regard to the proposed acquisition/sale, and in particular the provisional price at which he is, subject to better information, prepared to complete the acquisition/sale and the proposed timetable for the transactions.
The letter of intent is not a mandatory step in the acquisition process. Consequently, its content is not regulated by law. However, there are best practices or at least consistent practices.
The letter of intent is most often issued by the prospective buyer once they have obtained preliminary information about the target company.
The purpose of the letter of intent is to set the framework for the acquisition process and provide reassurance to both parties, confirming that it seems appropriate to continue with the process in light of the other party’s intentions.
In particular, the letter of intent is useful to confirm that the parties’ expectations of the price coincide.
The need to build trust is essential, particularly because the acquisition process takes time and incurs costs for both parties. Furthermore, the seller may fear missing out on alternative sale opportunities if the prospective buyer does not follow through on their intentions.
As its name suggests, a letter of intent sets out the author’s intentions regarding the proposed acquisition. To this extent, the letter of intent is not a contract, i.e. a document that gives rise to rights and obligations for the parties.
However, in addition to this non-contractual content, the letter of intent can also take on a contractual nature.
The prospective buyer, the author of the letter of intent, frequently asks the seller to grant him exclusive rights to buy the shares for a specified period. In order to obtain the seller’s agreement to this exclusivity, the prospective buyer asks the seller to countersign the letter of intent. This creates an agreement, the purpose of which is separate from the sale of the shares.
It is important to draft the letter of intent carefully so that the non-contractual and binding provisions are clearly identified.
In addition to its non-contractual content, the letter of intent can also take on a contractual nature. The prospective buyer, who is the author of the letter of intent, often asks the seller to grant them exclusivity for the purchase of the shares for a specified period. To obtain the seller’s agreement on this exclusivity, the prospective buyer must request that the seller countersign the letter of intent. This creates an agreement with an objective that is distinct from the actual sale of the shares.
The content of the letter of intent is not prescribed by law. However, generally, the letter of intent—assuming the prospective buyer is the author—includes all or some of the following sections:
1. The presentation of the prospective buyer and the reasons for the acquisition
The prospective buyer explains who they are and the reasons motivating them to pursue the transaction, for example, the synergies between their current activities and those of the target company.
2. Price approach
The prospective buyer outlines the parameters or method for determining the price and, if applicable, the provisional price they are willing to pay, based on their current understanding of the target company.
3. Guidelines for the transaction
The prospective buyer, often after discussions with the seller, specifies certain guidelines for the transaction or highlights specific elements that, in their view, should be included in the share purchase agreement. They may provide indications with regards to the continuation or non-continuation of the management’s activities after the acquisition, the existence of conditions precedent affecting the transaction, the seller’s representations and warranties, etc.…
4. Projected timeline of the acquisition process
The prospective buyer outlines the timeline they foresee for the process, particularly the deadlines for setting up the data room, conducting due diligence, negotiating, and executing the share purchase agreement.
5. Request for exclusivity from the seller
In return for the efforts they are about to make and the costs they are about to incur, the prospective buyer frequently requests the seller to grant them exclusive negotiation rights for the purchase of the shares for a limited period. This duration is determined based on the projected timeline of the operations.
To obtain a commitment to exclusivity, the prospective buyer asks the seller to countersign the letter of intent for acceptance.
While the scope of the signature is generally limited to accepting the commitment to exclusivity, the seller may be reluctant to countersign the letter of intent if they disagree with other provisions, such as the price approach. As a consequence, the letter of intent is frequently a subject of discussion between the parties.
6. Clarification of the nature of the letter of intent
The letter of intent does not constitute an offer to contract, meaning a complete contractual proposal for the purchase of shares the acceptance of which would create an agreement, specifically a share purchase agreement. The nature of the letter of intent should be determined by its content. However, an express clause is often included to clarify the nature of the letter of intent.
7. A clause regarding the applicable law and disputes
The letter of intent may take on a contractual nature, not concerning the sale of the shares but with regards to other commitments made by the parties, such as the seller’s commitment to exclusivity. In this context, it is common to include a clause specifying the applicable law (Belgian law or the law of another state) and which courts would have jurisdiction over any potential disputes arising from the letter of intent.
As part of the acquisition, the seller will be required to provide the buyer with information concerning the target company. Following the communication of this information, the parties will, unless the acquisition process is prematurely halted, discuss the terms of the transfer.
The information shared by the seller regarding the target company may be sensitive, particularly financial and commercial data related to the target company. The existence and the content of negotiations concerning the sale of the target company may also be sensitive information, both for the seller and the buyer. Specifically, the seller often does not wish to create a sense of uncertainty about the company’s future among its employees, customers, and suppliers.
As its name suggests, the purpose of the confidentiality agreement is to protect the confidentiality of the information provided by the seller to the prospective buyer, as well as the existence and content of the negotiations between the parties, in the case in which these take place.
Confidentiality agreements are also encountered in contexts other than business transfers. The content of a confidentiality agreement concluded during a business transfer does not fundamentally differ from confidentiality agreements concluded in other contexts.
A confidentiality agreement typically includes the following clauses:
1. Definition of confidential information
Generally, the confidentiality agreement contains a clause stating that, by default, all information provided by the disclosing party is considered confidential, with non-confidentiality being the exception. It is also often stipulated that both the existence and content of the negotiations are confidential.
2. Definition of non-confidential information
The confidentiality agreement usually contains a clause defining which information is, as an exception, not subject to confidentiality obligations. This frequently includes, for example, information that is already in the public domain or information that is received by a party without a breach of its confidentiality obligations.
3. Obligations regarding confidential information
Broadly speaking, the confidentiality agreement produces two main types of effects. Firstly, it prohibits the party receiving confidential information from disclosing it to third parties, except for purposes related to the transaction, and only to third parties who are themselves bound by a confidentiality obligation. Secondly, the confidentiality agreement restricts the use of confidential information by the receiving party and limits who can access the confidential information within the receiving party (typically a company). With regard to this last point, it is often stipulated that confidential information can only be shared with those who need it for the transaction.
4. Duration of the obligations linked to confidential information
Confidentiality is typically required during the acquisition process and for a defined period following its conclusion. In general, the importance of confidentiality obligations diminishes after the transaction is completed, especially since the share purchase agreement itself usually contains a confidentiality clause.
The share purchase agreement, often referred to as the ‘SPA’ by lawyers practising in this field, is the main document in a share transfer, the sale contract that sets out the rights and obligations of the parties in the transaction.
1. Brief or long share purchase agreement?
The share purchase agreement can be a very simple and therefore very short document.
From a legal standpoint, a share purchase agreement does not need to contain many elements to effect a valid transfer of shares. The document simply needs to reflect the parties’ agreement on the sale of the shares for a determined or determinable price. As a result, a share purchase agreement could, in theory, be very brief.
However, this type of brief agreement has two disadvantages.
First, it offers very limited protection to the buyer, as general law — meaning the legal provisions that apply regardless of the parties’ agreement — provides little protection for the buyer.
Secondly, a very brief share purchase agreement often proves insufficient to capture the complexity of a share transfer transaction.
The most important thing is to have a document that is adapted to the situation, i.e. the financial stakes involved and the wishes of the parties.
General law provides little protection for the person who buys a business via a transfer of shares.
This stems from the nature of the sale: legally, the buyer is acquiring shares in a company, not the business itself. This remains true even when the acquired shareholding is a majority or represents 100% of the company’s shares.
As a result, the protections offered by sales law (such as the warranty against hidden defects) apply to the shares being sold, not to the business itself. However, most of the complaints a buyer may have after acquiring a business through a transfer of shares are related to the assets or operations of the business: after the acquisition, certain liabilities emerge or are greater than expected, some assets are missing, etc…
In most cases, the buyer cannot raise any complaints about the shares they purchased: these were validly issued, represent the company’s capital or equity, and allow their holder to vote at the general meeting…
Therefore, in light of these considerations, if the buyer wants protection against unforeseen issues related to the company’s assets and liabilities after purchasing its shares, they must include such protection in the share purchase agreement. This protection derives from the contractual mechanism of the seller’s representations and warranties.
3. The content of the share purchase agreement
There are no specific regulations governing the sale of shares that require the inclusion of specific clauses. There are, however, contractual practices that lead to share purchase agreements often having and containing a similar structure and clauses respectively, particularly for transactions of significant financial value.
There are exceptions to this norm, however. These may, for example, arise when a particular power dynamic exists between the parties, which leads to one party making concessions that deviate from typical market practices.
3.1 The object of the sale and the sale price
The share purchase agreement must contain the two necessary elements for its validity: (i) the identification of the shares being transferred and (ii) the price, which must either be determined or determinable.
There is often a time lag between the moment when the price is determined (or the date of the accounts on the basis of which the price is determined) and the moment when the price is paid and the purchaser becomes the owner of the target company. This period can be very long, particularly if the closing can only take place after the fulfilment of conditions precedent.
However, during the period between these two events, the company has continued to operate; it has recorded profits or, on the contrary, incurred losses. When it comes to determining the price, how should this situation be handled? Who, the buyer or the seller, benefits from these gains or bears these losses?
There are two techniques: ‘closing accounts’ and the ‘locked box’.
In the ‘closing accounts’ technique, a provisional price is determined on the basis of ‘reference accounts’, which are available when the share purchase agreement is executed.
To arrive at the definitive price, this provisional price established on the basis of the reference accounts is subject to adjustments on the basis of the closing accounts, i.e. accounts established on the date of the closing (or a date close to it).
Where appropriate, the parties may agree that the final price be established by applying accounting rules that differ from those used to establish the reference accounts. For example, certain old stocks or old receivables will be valued less favourably to the seller than those resulting from the latest accounts.
In summary, the closing accounts technique involves the following steps:
- A provisional price is determined in the share transfer agreement, based on reference accounts;
- Closing accounts are drawn up, i.e. accounts as at the closing date;
- A definitive price is determined, with positive or negative adjustments to the provisional price, on the basis of the closing accounts.
It then remains to determine in particular (i) whether the seller or the buyer draws up the closing accounts, (ii) the period within which the other party may contest the closing accounts and, consequently, the determination of the final price and (iii) if the parties still disagree on the closing accounts and the final price, the manner in which this dispute will be settled. In the case of a financial dispute, it is often advisable to have recourse to a third party expert, such as an auditor or chartered accountant.
In the ‘locked-box’ technique, the price is determined on the basis of historical accounts, drawn up on the ‘locked-box date’, i.e. a date prior to that of the share purchase agreement, without any adjustment mechanism. Since there is no longer any adjustment, there is no longer any need to prepare closing accounts.
The profit or loss recorded by the target company since the locked-box date accrues to the buyer. Where applicable, the buyer must pay the seller interest on the price thus determined, to compensate for the fact that payment will be made after the price determination date.
In short, with the locked-box technique, the economic value of the company is determined on the basis of an old accounting situation, without any adjustment at closing.
Since there is no adjustment at the closing date on the basis of closing accounts, the buyer takes the risk that, after the locked-box date, the seller may have carried out transactions that are outside the normal course of the target company’s business and that have a negative impact on the company’s assets. Such transactions may, for example, involve voting to distribute a dividend or paying higher management fees, etc. These various transactions are referred to as ‘leakage’. In the share transfer agreement, the parties must specify which leakage transactions are prohibited/authorised and specify their impact on the price.
Subject to the permitted leakage transactions, the company is in a sense locked in, which is why this pricing technique is called the ‘locked-box’ technique.
The price may also include an “earn-out.” This refers to a portion of the price that the seller must “earn” based on the financial performance of the company after the acquisition.
Earn-outs are more commonly used when the seller is also the manager of the company and remains the manager of the company after the acquisition; in those cases, it serves as an incentive for the seller to contribute to the company’s performance.
3.4 Payment terms of the sale price
The share purchase agreement must outline the terms of payment.
When a provisional price is subject to adjustment based on the closing accounts, it is common for a portion of the price to be paid at the closing. With the balance—either decreased or increased based on the adjustment—being paid upon determination of the final price.
3.5 The seller’s representations and warranties mechanism
The price of the target company’s shares is set on the basis of certain expectations or representations made by the buyer. What happens if, after the sale, it turns out that these expectations or representations are inaccurate? Who bears the risk of the buyer’s disappointment?
This situation is addressed by the seller’s representations and warranties mechanism.
The share purchase agreement usually contains, in an appendix, representations made by the seller. The seller’s representations relate both to the shares sold and to the target company.
Essentially, the seller declares that the company is in good working order and is legally sound in various respects.
The penalty for inaccuracy in one of the seller’s representations is the seller’s warranty, i.e. the seller’s obligation to compensate the buyer or the target company for the loss resulting – most often for the target company – from the inaccuracy of the representation concerned.
Although the representations and warranties mechanism aims to protect the buyer by indemnifying him in the event of a setback, this protection has its limits (see below). The representations and warranties mechanism ensures that the risks are shared between the seller and the buyer, according to terms that are discussed and set out in the share purchase agreement.
From the buyer’s perspective, it is important to ensure as much as possible, that the seller’s representations are sufficiently broad and cover the key points that influence the buyer’s decision to acquire the target company.
From the seller’s perspective, it is crucial to verify whether the representations are accurate or if they require reservations or exceptions. The seller’s representations are often the subject of discussions between the parties.
The seller is frequently required to specify exceptions with regards to their representations. These are referred to as “disclosures”. It is often agreed that the information contained in the data room will, in its entirety, serve as exceptions to the seller’s representations.
Here are some examples of points covered by the seller’s representations:
1) The transferred shares
The seller declares that the shares being transferred represent all the issued shares of the company.
2) The accuracy of the target company’s annual financial statements
The seller declares that the company’s most recent annual financial statements—often referred to as the “reference accounts”—and/or any subsequent accounting situation, accurately reflect the target company’s position, its assets, liabilities, and income statement as of the date of those accounts.
3) The management of the target company since the date of the reference accounts
The seller declares in essence that, since the date of the reference accounts, the company has been managed in the ordinary course of its business.
4) The target company’s authorisations and licenses
The seller declares that the target company holds all the necessary authorisations and permits to conduct its activities as they are currently being carried out.
5) The target company’s compliance with labor and social security law
6) The target company’s compliance with tax obligations
7) Compliance with environmental regulations and absence of soil contamination
Environmental issues, especially soil contamination, are becoming increasingly important due to their potential financial consequences.
8) Absence of litigation
The seller declares in essence that there are no disputes involving the target company, apart from any that have been disclosed in the data room.
9) The completeness of the information provided to the buyer
The seller essentially declares that, before the conclusion of the share purchase agreement, they have provided the buyer with all information related to the company that a potential buyer might consider important to carry out the transaction in an informed manner.
The buyer’s warranty claim is not a liability claim but rather a contractual mechanism for price adjustment. There are significant differences between a warranty claim initiated by the buyer and a liability claim.
For example:
| Liability claim | Claim based on the seller’s warranty |
| The triggering factor is a fault by the liable party. | The triggering factor is the inaccuracy of one of the seller’s representations, without the need to establish the seller’s fault. |
| The victim must prove their damage and it is this damage that determines the amount to be paid by the liable party. This amount is received by the victim directly. | In most cases, the buyer proves the damage to the target company resulting from the inaccuracy of a representation, rather than their personal damage.
The seller’s payment obligation then corresponds, after the application of contractual mechanisms, to the damage suffered by the target company. Share purchase agreements therefore generally provide that the damage incurred by the company is deemed to be incurred by the buyer. They often stipulate that the buyer can either direct compensation to the target company or claim the benefit directly. |
The seller’s statements correspond to an image, a representation of the target company, which the seller declares to be true to life. When does this image refer to and is this guarantee given?
The seller’s representations are generally given at the time of signing the share purchase agreement. The agreement may also stipulate that the representations are deemed to be repeated at the time of closing if the closing occurs after the signing. The principle is that from the date of closing, the management of the company is transferred to the buyer, who assumes the business risk.
Some representations are made “to the seller’s knowledge”. In other words, the words ‘to the seller’s knowledge’ are added to the representation. The seller therefore declares that the situation described in the declaration is correct, but only to his knowledge.
This significantly limits the scope of the representation. If the buyer wishes to invoke the warranty based on the inaccuracy of a representation made to the seller’s knowledge, they must demonstrate both that the representation was inaccurate and that the seller was aware of this inaccuracy. However, it is often difficult to prove that someone had knowledge of a situation.
The scope of the “to the seller’s knowledge” clause can be clarified in favor of the buyer. It can be specified that the “seller’s knowledge” refers not only to the seller’s actual knowledge—which is difficult to establish in practice—but also to the theoretical knowledge of a director who performs their duties with care and diligence.
A buyer who is unable to prove that the seller had knowledge of the inaccuracy of a representation will therefore be able to defend that an ordinarily diligent administrator should have known of the inaccuracy of the representation.
The notion of specific indemnities relates to the following issue: during due diligence, the buyer may have identified irregularities that could potentially cause damage to the target company, but the extent of the damage cannot be measured and quantified at the time of the signing of the share purchase agreement. The buyer may then arrange for “specific indemnities” to be included.
The indemnities are “specific” in the sense that the usual limitations on the seller’s indemnification obligations under the warranty (such as de minimis clauses, caps, or time limits for making warranty claims) do not apply to them.
3.11 Limits of the seller’s warranty
The share purchase agreement typically includes limits on the seller’s obligation to indemnify the buyer in case of a warranty based claim. It is in this sense that the representations and warranties mechanism shares the risks between the buyer and the seller.
There are time limits, meaning a deadline by which the buyer must formulate and submit their claims. These limits generally vary depending on the nature of the buyer’s claim. For example, claims related to tax matters, broadly defined, can often be made within the limitation periods applicable to such matters. In addition to specific deadlines for making claims invoking the warranty, there is usually a general time limit. In practice, this time limit can range from 6 to 36 months.
Monetary limits are also usually imposed on the amounts the buyer can claim. Here are three frequent provisions:
1) The de minimis clause
The de minimis clause entails that the buyer’s individual claim must involve a minimum amount; otherwise, the claim will not be considered. In other words, the parties agree that problems they consider minor – in relation to a fixed amount – will not give rise to warranty claim.
2) The basket
The general threshold clause entails that the seller is not obligated to indemnify the buyer as long as the damage (after applying the de minimis clause) does not reach a specified amount. In other words, the parties agree that the buyer will have to bear a threshold of damage, without recourse against the seller, but that if this threshold is exceeded, the buyer will be able to issue a warranty claim for all the damage.
3) The cap
The cap clause limits the seller’s indemnification obligation under the warranty to a specified amount. It is often stipulated that the cap does not apply to damage directly related to the shares being sold.
3.12 Procedures for invoking a warranty claim and disputing a warranty claim
The share purchase agreement usually outlines the procedures the buyer must follow when invoking the warranty. This includes specifying the facts underlying the claim, the representation or representations on which the buyer is basing their claim, providing documentation supporting the claim, and providing an estimate of the amount of the claim under the warranty.
The share purchase agreement also typically sets out the procedures for the seller to dispute the warranty claim: does the seller have a defined timeframe to dispute the claim? What are the consequences if the seller fails to contest within the given time limit?
3.13 The procedure applicable to third-party claims
Sometimes, the issues a warranty claim because of a third party claim, i.e. when the inaccuracy of a representation is the result of a claim made by a third party. For example, the tax authorities consider that the target company is liable for tax for the period prior to the transfer, whereas the seller has declared that the target company has fulfilled all its tax obligations.
In the event of a third party claim, the share purchase agreement must determine whether the seller or the buyer is in charge of managing the dispute, to what extent the parties obliged to cooperate in managing the dispute and whether the target company may settle or admit liability to the third party without the seller’s consent.
Generally, the seller can argue that their knowledge of the company and potential liability for the third-party claim should give them control. While the buyer may argue that the target company is directly facing the third-party claim and that the seller’s warranty has limitations.
3.14 Mechanisms to ensure the seller’s solvency in case of a warranty claim
The share purchase agreement may include mechanisms to ensure the seller’s solvency in the event of a warranty claim. In other words, it is a question of ensuring the effectiveness of a warranty claim. It is useful for the buyer to have recourse against the seller, but this is useless if the seller is insolvent in the end.
Here are the three most common mechanisms used to ensure or improve the seller’s solvency in the event of a warranty claim:
1) The deferred payment of a portion of the price
The buyer does not pay the full price at the closing but retains a portion for an agreed time period. This mechanism is sometimes referred to as a ‘vendor loan’. If a valid claim is made under the warranty, the buyer will have the option to adjust the amount owed to the seller.
2) A bank guarantee
A bank commits to pay, up to a certain limit, the amount claimed by the buyer under the warranty. Various types of bank guarantees exist, including the “first demand” guarantee.
3) The escrow agreement or blocked account agreement
It consists of a tripartite agreement between the buyer, seller, and a bank. A sum is placed in a blocked account, which can only be released to one of the parties based on the agreement of the other party or a court decision.
3.15 Conditions precedent
The share purchase agreement may include conditions precedent. A condition precedent is a future uncertain event that suspends the enforceability of obligations, especially the seller’s obligation to sell the shares and the buyer’s obligation to buy the shares and pay their price.
A classic example of a condition precedent is the buyer obtaining financing covering a specified portion of the purchase price of the shares. Another classic example is obtaining a waiver from a co-contracting party of the target company to not enforce a change of control clause in the context of the acquisition.
It is necessary to specify in the share purchase agreement the timeframe within which the condition precedent must be fulfilled. It is also useful to mention in the same document which party benefits from the condition precedent (for example, the buyer in the case of a condition regarding the obtaining of financing). This party can then waive the fulfilment of the condition precedent if they choose to.
3.16 Organisation of the closing
The share purchase agreement outlines the various obligations of the parties at the closing.
3.17 The non-compete and non-solicitation clause
The seller of shares is not automatically bound by a non-compete obligation with respect to the company whose shares they sold. This means that, within certain limits, after the sale they may start a business competing with that of the company they have just sold. Therefore, it is recommended from the buyer’s perspective to include a non-compete clause.
The non-compete clause must contain three limits:
1) A material limit, defining the specific activity that the clause’s debtor (the seller) is prohibited from engaging in.
2) A territorial limit, specifying the geographical area where the defined activity is prohibited.
3) A temporal limit, indicating the time period during which the non-compete obligations apply.
These limits must be reasonable and must aim to protect the company without extending the non-compete obligations beyond what is necessary for that protection. For example, if the company operates only in a specific region, it is in principle not acceptable to extend the non-compete obligation beyond that region.
In the past, a non-compete clause that was excessive in scope—whether materially, territorially, or temporally—would typically be deemed null and void, with no possibility of judicial adjustment.
However, since a 2015 ruling by the Court of Cassation, it is now possible to reduce the scope of an excessive non-compete clause, provided that the reduction aligns with the parties’ intentions.
To meet this requirement, it is advisable for the non-compete clause to state that, if it were ever deemed excessive, the judge would have the authority to reduce its scope to a reasonable extent.
3.19 Final clauses
The share purchase agreement includes final clauses. Most of these clauses are not specific to share transfers but are common contractual provisions, such as:
- The “notifications” clause specifies the formal rules for notifications to be made under the share purchase agreement and when a notification is deemed to have been made.
- A confidentiality clause governs the confidentiality of the share purchase agreement and, if applicable, the information exchanged during the acquisition process.
- The “entire agreement” clause states that the rights and obligations of the parties are summarized in the share purchase agreement, with prior documents considered devoid of legal significance on the matter.
- A clause specifies the applicable law for the share purchase agreement and designates the courts (or provides for arbitration) to resolve disputes arising from the agreement.