What are the board requirements when considering the sale of a company?
The board plays a central role in the decision- making process when considering the sale of the company. The directors hold serious fiduciary obligations to the company and its stakeholders (including shareholders, employees and creditors).
Ultimately, in a private company with closely held shareholdings, the shareholders hold the power to agree to sell. However, the board’s role is critical in ensuring shareholders are fully informed, protected and placed in the best possible position to maximise the benefits a sale can bring.
Shareholders hold no fiduciary obligations and at law are not required to consider the interests of the company, personnel or other shareholders in making a decision to sell shares (subject to any obligation in a shareholder’s agreement).
Key considerations for the board include:
Engagement and management of professional advisers (financial and legal) acting on the sale. Typically, the share sale agreement will ensure the costs are borne by the selling shareholders. But what if the sale falls through? The company is left with the bill for work that arguably was for the benefit of the shareholders, but in circumstances where there are no proceeds of sale to offset those costs. The board should consider the company’s interests at all times. Sometimes, the selling shareholder(s) may formally engage the advisers themselves, in which case the board will need to consider whether it is appropriate for the company to obtain its own independent advice, noting their obligations to the company — as it is possible the interests of the company and the selling shareholders may diverge.
Managing the due diligence process. It is usual that potential buyers will want to conduct due diligence on a company, which can be disruptive and complex to manage. At a practical level, this involves pulling together the requisite materials, assessing with advice what should or should not be provided and dealing with the multitude of requests and queries. Issues like privacy and legal privilege need to be carefully navigated. This process can take many months and consume enormous energy and resources with no guarantees the sale will complete. This critical role falls to the board to manage effectively, while ensuring the business of the company continues to operate and prosper.
Typically, the existing board will resign on completion of a 100 per cent share sale. The selling shareholders generally have an obligation in the sale agreement to procure the written resignations of the directors, which raises the following issues for the outgoing directors to consider:
Usually, the resignation confirms the director has no claims against the company. Any outstanding claims should be resolved before completion.
The directors should seek to ensure the buyer gives a release in favour of the directors (and company employees) in relation to claims under the share sale agreement — such claims should properly be made against the selling shareholders.
The outgoing board should consider its D&O arrangements and whether an obligation to maintain run-off be imposed on the buyer. The cost of this is unlikely to be borne by the buyer.
The board should be across what is proposed regarding approaches made to third parties and/ or regulators of the company in the period between signing and completion. It is generally in the interests of business continuity that company management coordinates any approaches made to those third parties or regulators.
It is advisable the board is aware of what is proposed for employees of the company under the sale, to ensure that, at a minimum, those employees’ statutory entitlements will be observed.
Directors are personally liable to the ATO for any unpaid PAYG, GST or SGC of the company. The directors should ensure that, at the time of their resignation, there are no such unpaid amounts.
No doubt, other issues will arise on a case-by- case basis. However, in all cases, directors should ensure that the company is properly advised, and they always need to consider matters from the perspective of directors of the company as opposed to a seller of its shares.
Andrew Lacey MAICD heads the litigation and dispute resolution group at McCabes Lawyers.
Latest news
Already a member?
Login to view this content