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‘declaration of intention’, in other words, a Letter of Intent by the buyer regarding the acquisition of the target company. The Letter of Intent often forms the basis for later contracts.

Following the Letter of Intent, the buyer usually commences the respective due diligence exercise (see above).

4.3.3  Key Elements of the Share Sale and Transfer Agreement

The sale and transfer of the shares is regulated by a share sale and transfer agreement. Depending on the complexity of the transaction, the share sale and transfer agreement will often be quite a voluminous document. In any case, the share sale and transfer agreement will contain the following key elements:

•Agreement by which the seller offers to sell and transfer the shares (including all ancillary rights of the shares) to the buyer with effect from a certain date and acceptance of such offer by the buyer.

•Amount of the purchase price and specification of the time when the purchase price shall be due (see Sect. 4.3.3.1 below).

•Warranties and indemnifications given by the seller (see Sect. 4.3.3.2 below).

•Any covenants given by either party (see Sect. 4.3.3.3 below).

4.3.3.1  Purchase Price

The purchase price may be a specific figure. In this case, the purchase price is usually based on the last balance sheet date, and all profits and losses after such balance sheet date are taken over by the buyer. This means that the target company shall be transferred to the buyer in such state as it was at the last balance sheet date, i.e. without any dividend payments or capital measures following such date. For the seller who still owns it between the last balance sheet date and completion date, the target company is thus treated like a locked box—which is why this purchase price structure is called a ‘locked box’structure.

Often, however, the purchase price is agreed only as a formula, containing a base purchase price and a method of calculation by which the base purchase price is to be adjusted. This is often used when the purchase price reflects the correct market value at the time the transaction is completed, which is usually later than when the share purchase agreement is signed. In this case, the parties agree that they will establish a balance sheet of the target company at the time of completion (so-called ‘closing balance sheet’), with the base purchase price being increased or decreased by certain positions from such balance sheet. Obviously, such closing balance sheet does not exist at the time of signing of the share purchase agreement; the agreement, therefore, needs to carefully spell out the exact parameters for the closing balance sheet including a mechanism for resolving disputes.

In some cases, notably when seller and buyer cannot agree on the prospects of the business, an earn-out is agreed. In this case, the purchase price will be increased if the target company performs at a certain level following the transfer of shares.