How to Get Things Right when You Prepare Your Company for Sale

Vitaliy Izyanov
9 February 2017

How to Sell a Company: 4 steps towards a successful transaction

If you decide to sell your business, you should remember that it is important to prepare the company for the transaction in an appropriate way. You should plan how you can avoid complications and what steps are to be taken first, as Vitaly Izyanov, the head of the Russian corporate practice of IPT Group, writes in his column.

Step 1. Start preparing the business for sale

As a rule, the party that sells a company has to declare their full competence, as well as the good title to the assets on the balance sheet. All that you have to do after that is to obtain documents to confirm that. Companies do not always take the necessary measures in respect of their legal support and document management, including in the area of corporate/legal and contractual relationships. Some managers believe that documents of the organization can be amended later, if necessary, and backdated, only if it is found out that they are necessary. However, after the company has been operating for several years, there may be a potential buyer who wants to purchase it, so it has to be prepared appropriately.

Some managers believe that the documents of the organization can be issued later, when they become necessary.

The purpose of preparing a business for sale is to exclude or minimize any potential problems that may arise in connection with the transaction because of any legal requirements, as well as due to the possible claims of the the buyer against the company and its assets, which could affect the price of the transaction. To do this, the seller should arrange the Due Diligence procedure for the company which is to be sold and its assets, and eliminate any defects found during the audit, if any. In order to prepare the company for sale, you should use the services of a specialized law firm that will conduct comprehensive due diligence procedures and minimize/eliminate the defects and risks that were detected.

Step 2. Do your best to eliminate the defects

So, the Due Diligence is completed, and any deficiencies or missing documents were revealed, as well as the related risks. This can happen, for example, when the authorized capital of the company has not been fully paid, or when the Articles of Association have not been brought into conformity with the legislation, or when the constituent documents, certificates and title deeds are lost.

These deficiencies are material and must be eliminated before effecting the sale of the company; if necessary, duplicate documents have to be obtained. If any deeds of title for the company property and the documents confirming its rights (i. e., sale and purchase agreements, loan agreements, etc.), or personnel and accounting documents, are not available, they must be issued again. The information in the registers that contain data on the organization, i. e., the register of owners of registered securities (for joint-stock companies), the Unified State Register of the Real Estate Property and Transactions therewith (EGRP), the Unified State Register of Legal Entities (EGRUL), etc., must be complete and in compliance with the facts and with the documents of the company. In case of any differences between the details, take measures to have the entries in the registers amended as necessary. The most common inconsistencies in the information in the Unified State Register of Legal Entities: inaccurate records of economic activities, wrong address of the location of the company and its members, lack of information about the registrar (in case of joint stock companies).

Any defect of the company and its assets identified by the buyer will result in the reduction of the price of the transaction.

It must be borne in mind that the buyer will also check the company, and any defect of the company and its assets identified by the buyer will result in the reduction of the price of the transaction. If it is impossible to eliminate the deficiency, the buyer may refuse to finalize the deal.

Step 3. Don't forget about corporate approvals

Many manages proceed with their current business without taking into consideration any corporate approvals of the transactions in accordance with the Articles of Association and the effective legislation. As a matter of fact, such transactions may be approved only upon the request of a counter-party, for example, if it is necessary to obtain a bank loan.

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As the legislation provides the new member or shareholder with an opportunity to challenge major transactions or related party transactions which were effected without due corporate approval, it is necessary to obtain approval of transactions like that to minimize the risk of their being recognized null and void after the sale of the business. To do this, after the completion of the due diligence, the auditor lists any transactions performed by the company without a corporate approval (first of all, those committed with affiliates of the current members/shareholders), and approvals shall be obtained from the appropriate management bodies of the company. It is also recommended to obtain approvals of the transactions from your counterparty, but in practice there may be considerable difficulties in doing that. If the company failed to hold any meetings, ordinary (for limited liability companies) or annual (for joint-stock companies) in accordance with the Articles of Association and the current legislation, holding such meetings at a later date may result in administrative liability for the company and its officials.

When the company implements its current operations, it has to issue corporate legal documents in compliance with the current legislation, because issuing duplicate documents later or issuing documents with the current date may sometimes mean violating the law.

Step 4. Structure the deal with due account of the interests of the parties

When the sale of a company is effected by selling its shares/share in the authorized capital, the seller's main task is to receive the payment and prevent the seizure of the money after the completion of the transaction. For this purpose, the seller should check the legal capacity of the buyer as a legal entity (i. e., check its constituent and registration documents, as well as the corporate approval of the deal) or as an individual, in order to minimize the risk of the recognition of the agreement as invalid.

After that, you have to agree the payment procedure with the buyer; it should take into account the interests of both parties to the transaction. Buyers may not agree to pay before the transfer of title for the shares/share in the capital due to the risk that the seller may fail to perform its obligation to transfer the title. A seller also faces similar risks if the money is to be paid after the transfer of title to shares/share in the capital. One of the payment methods used for purchasing shares/share in the capital of a legal entity which protects the balance of interests of the parties, is a settlement with the use of an irrevocable letter of credit which the buyer obtains from its Bank and which is used for the benefit of the seller when the latter provides a document confirming the transfer of rights to shares/share in the capital to the buyer (extract from the Unified State Register of Legal Entities/confirmation of the registration of the transaction in the register). Besides, there is an opportunity to plegde shares/share in the capital in favour of the seller until the buyer fulfills its obligation to pay. For the implementation of the transaction, it is also important to agree on the procedure and terms of the transfer of documents and seals, as well as the changes in the management bodies of the company (the Director General and the Board of Directors).

To achieve success in all the activities relating to the selling of the business, transaction structuring and implementation, you should use the services of experienced lawyers or a specialised legal firm.

Vitaliy Izyanov

The head of the Russian corporate practice

Law Ininvestments 30 September 2016

Mikhail Larin

The General Counsel of the Legal Support Department for Investment Projects

Finance Law 30 September 2016

Mikhail Polozov

Deputy Head of the Legal Support Department

Jurisprudence 7 June 2016

Lada Notova

Lawyer, MA student at Law School, Mikhail Lomonosov Moscow State University

Press-Secretary IPT Group
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