In part 1 we looked at the steps and documents needed to effect a share buyback. One of the most crucial documents in the buyback process is the buyback agreement which sets out the conditions for the share buyback.
In part 2 we cover the standard items that would be covered in a buyback agreement.
In a buyback agreement, the company is obliged to pay a particular price for the shares. This price must be agreed between the parties. The buyback agreement will also indicate whether this price is to be paid in full or over a period of time. If the price is to be paid over a period of time, then the schedule for payments needs to be set out clearly in the buyback agreement.
Sometimes exchange (i.e. the signing of the buyback agreement) and completion (i.e. when the shares actually transfer from the shareholder back to the company) fall on different dates. For example, the parties may sign and exchange the buyback agreement but the company may require a further 5 or 10 business days to obtain the funds to pay the shareholder. The completion clause is important because it sets out:
- the date, time and place for completion to occur;
- the steps the company needs to take e.g. paying the full price for the shares; and
- the steps that the shareholder needs to take e.g. handing over a letter of resignation and any other company documents that may be in its possession.
A company does not control what a shareholder does with his or her shares. This is why seller warranties are an important and often very extensive part of a buyback agreement. The seller warranties will cover several important items, including that:
- the selling shareholder is the legal and beneficial owner of the shares;
- the selling shareholder has the rights and power to sell the shares;
- there are no encumbrances on the shares;
- the selling shareholder will not be breaching any third party agreements in selling the shares.
This is an inclusive and non-exhaustive list. What needs to be included in a set of seller warranties depends largely on the business and industry.
Indemnities and release
Often when a shareholder signs a share buyback agreement, he or she ceases all involvement with that company. If he or she was a director or employee, a letter of resignation is often handed over on completion. If this is the case, then the indemnities and release clause needs to be carefully drafted so that both parties are well protected.
The company will need to indemnify the selling shareholder against any future claims on the company and release the selling shareholder from any debts and liabilities that the company has or will have in the future.
On the other hand, the shareholder will need to release the company from any claims that he or she may have against the company and agree that such claims have been settled by the payment made by the company for the shares.
Are there any other documents which need to be signed?
For some share buybacks there will be a number of additional documents which need to be signed in addition to the buyback agreement. This often depends on whether the selling shareholder had other roles within the company. For example, if the shareholder was also a director, it may be a condition of the buyback agreement that he or she hands in a letter of resignation. Furthermore, if the shareholder owned particular intellectual property, then the shareholder may be required to execute an intellectual property assignment deed to assign ownership of the relevant intellectual property back to the company.
Buyback agreements can be complex and lengthy documents. Regardless of whether you are the shareholder selling the shares, or acting on behalf of the company that is buying back the shares, there are serious legal implications for both parties when entering into a buyback agreement. It is important that a buyback agreement is properly drafted by an experienced contract lawyer. If you are the recipient of a buyback agreement, we recommend that you have it reviewed professionally.