The Bite-Size Business Brief: Mind the Gap

Mind the Gap

introduction

In M&A transactions involving a share sale in the UAE and the wider Middle East it is usual that there is a gap between the date the share purchase agreement (SPA) is signed and the date ownership in the shares transfers (commonly referred to as completion). Sellers should pay close attention to this gap because it ties to when the seller reaches payday for the shares.

Why does the gap occur?

• Registration of share transfers: in the Middle East region it is usually the case that a government department (for example an Economic Department or free zone authority) will act as the gatekeeper for any share transfer and they will often require documents to be submitted to them or signed in their presence which they will subsequently review and process before granting approval. This process may take a number of weeks to complete and a transfer of shares is generally only effective once the share transfer is registered with the relevant government department. This contrasts with many other jurisdictions where a share transfer can often be recorded in the company books and agreed privately between a buyer and seller, without needing to seek any third party approval. It is usually agreed that the main payment for shares should be tied to when ownership transfer is recorded. If signing the SPA is not simultaneous with completion then there will be a gap between signing and completion. 

• Satisfying conditions precedent: depending on the extent of diligence conducted, a buyer may require that certain conditions are satisfied before they are willing to purchase the shares. These conditions could include regulatory approvals that are mandatory as a matter of law (e.g. approvals from competition or industry specific authorities) or other third-party consents based on the contractual agreements of the target company (e.g. that require consent if there is to be a change of control). Other examples include a buyer requiring a corporate restructure or the settlement of debt or other liabilities.

What are the risks of the gap?

A gap between signing the SPA and completion can mean there is a degree of uncertainty as to whether a transaction will actually complete. For example, if a condition precedent is incapable of being satisfied or is not satisfied by a longstop date agreed in the SPA then a buyer will usually be entitled to terminate the SPA. A buyer may also have the option to terminate the SPA if a material change arises during the intervening period rendering certain operational warranties untrue. 

During the gap, a buyer will usually require the sellers to operate the business in the usual course but subject to certain limitations whereby numerous operational matters may require their consent. A buyer may also request access to the business, perhaps including attending board meetings. All of this can impact the day-to-day operations and could impact customer or employee relations.

How does a seller manage these risks?

When agreeing the conditions a seller should ensure they can each be satisfied in an achievable and measurable way and any timeframe should also be sufficient to ensure they can be satisfied before any longstop date. 

During the interim period sellers should carefully monitor the operations of the target company to ensure continuing compliance with the warranties. If a warranty breach is to arise then a seller may have the right to disclose against the breach, which may avoid the risk of a claim or the right of a buyer to terminate. 

Show me the money!

A key concern for a seller is ensuring the cash they are due to be paid is guaranteed. The timing of payment is usually tied to the time that ownership in the shares transfers. If there is a concern as to the buyer’s financial standing or ability to make the payment when required then parties may choose to appoint a third party escrow agent (usually a bank) to whom the buyer will pay the cash some time after the SPA is signed but before ownership has been transferred. This will provide comfort to the seller, since it is generally the position that the escrow agent may only transfer the cash (a) to the seller upon evidence that the share transfer has completed or (b) back to the buyer if the SPA has terminated.