Recommendations to take into account when buying and selling a company
Main recommendations to take into account when buying and selling a company
Here follows a brief review of some basic issues that we must consider before formalizing the sale of a company:
How should we formalize or document the sale of a company
We speak of the transfer of a company when control of its management is transferred. To this end, the most common formulas are the sale of participations/shares and the sale of a business unit or branch of activity. Both allow the transfer of a business in exchange for a price.
The choice between one and the other is a matter that we already analyzed in greater depth in our article “Choose between buying and selling shares or buying and selling assets”.
According to art. 106 of The Companies Act Capital the transfer of shares must be recorded in a public document. Even if that was not the formula chosen, it is advisable to make the purchase agreement public in any case by signing the contract before a notary.
In the sale of companies, and before the purchase by a single purchaser, it will be necessary to carry out and register in the Mercantile Registry the declaration of sole proprietorship within the period of 6 months.
According to art. 14 of the Capital Companies Law, the sole shareholder will be personally, unlimitedly and jointly liable for the company debts contracted during the sole proprietorship period when the registration is not recorded.
However, once the sole proprietorship is registered, the sole partner will not be liable for any debts incurred later.
More information on Buying and Selling Companies
Issues depending on the size of the company sold
Small Businesses
In these cases, in the case of limited companies , the main issues to take into account refer to the limitations imposed by art. 107 of the Capital Companies Law and others that may have been contained in the company’s bylaws.
The partner who sells his shares must always notify the company of his willingness to sell. According to art. 107 LSC, the rest of the partners will have preferential acquisition rights, which means that the seller can only sell his shares to a third party when no other partner is interested in buying them.
Medium and large companies
In the case of public limited companies, we must analyze the possible limitations that the statutes may contain. According to art. 123 LSC this type of limitations are only admissible when they fall on registered shares (are those that are issued in the name of a holder) and are expressly imposed by the statutes.
It is also convenient to consider the different forms of representation of the shares, through certificates or through book entries (arts. 113 and 118 LSC and art.6 et seq. TRLMV).< /p>
Consideration of the bylaws and partner agreements
Considerations have been made on the need to analyze the bylaws and assess possible limitations on the transfer of shares and participations.
In addition, the signatory partners must comply with the obligations to which they have committed themselves in the partners’ agreement if it exists.
Risk assessment from a legal point of view
The buyer of a company is interested in knowing first-hand the legal situation of the company that is going to acquire, in order to locate possible future responsibilities that you have to deal with.
In practice, the risk assessment process is known as Due Diligence, and operates as a legal audit in which diagnose contingencies that may generate some type of liability in the future.
For example, if the company has just laid off an employee, there is a possible future risk that that former employee may file a lawsuit for severance pay.
In the same way, the due diligence can diagnose fiscal irregularities that could derive in a liability of the company in case tax inspection or claim by the Tax Treasury during the following 4 years.
All these risks may have a direct impact on the final purchase price of the company, or on the method of payment thereof. It is common to retain part of the price until those risks have disappeared.
Other things to consider before buying a company
Here are some additional considerations that deserve attention:
- The sale does not affect the previous debts of the company, and the acceptance of the creditors is not required for the sale to take effect.
- Employment contracts, leases, with suppliers, etc. they will remain in force without any variation, unless some change has been foreseen in them in the event of a change in the shareholding, which is not usual.
- In the same way, the licenses or concessions held by the company that is the object of sale will remain in force.
- Special consideration to sole proprietorships. The law establishes particularities in decision-making when it comes to this type of company, which will affect when the sold company is sole proprietorship, but also when it is the buying company.
- Distinction between the total transfer of the company or merely partial by the sale of part of its shareholders. In legal practice, we speak of company transfer when the buyer acquires effective management control. Obtaining effective management does not require in all cases the total purchase of the company, but of course it will be necessary to purchase a significant part of it. This circumstance will be an essential element to agree on the sale price and the rest of the conditions.
