This lesson focuses on some of the key transaction documents that you might come across whilst working in the private equity team of a law firm: articles of association, engagement letters, heads of terms, intercreditor agreements, investment agreements, management warranty deeds, non-disclosure agreements, sale and purchase agreements, share certificates, shareholders’ agreements, and stock transfer forms. We go into many of these documents in significant detail in our Mergers and acquisitions course, so have kept this lesson high level.
Articles of association: a document that is first drawn up by the founders of a company (or automatically generated by Companies House, if the company is adopting the standard model articles) at the time the company is incorporated. A company’s articles of association sets out a series of written rules (each being an “article”) that govern the running of the company. For example, articles of association will generally cover directors’ powers and responsibilities, the decision-making procedures that must be followed by directors and shareholders, the rules that apply to the issue and transfer of shares and the payment of dividends, the rights attached to each class of share that a company has in issue, and a broad range of other administrative matters. Note that as a company evolves, it might adopt amended articles of association at various points to better reflect its activities and scale.
Engagement letter: this is a letter between a client and their advisor that sets out the scope of the work to be carried out and the terms governing their working relationship.
Heads of terms: the phrase “heads of terms” is typically used to describe a set of proposed high level deal terms that the parties to a prospective transaction have agreed in principle. Heads of terms essentially record and formalise the outcome of early discussions and negotiations, which often initially take place on calls, in meetings, and over email. Signing a heads of terms can help to signal that both parties are provisionally happy with the deal that has been (informally) agreed, and want to proceed on this basis.
Intercreditor agreement: these are documents that regulate the order of priority – and various other rights that exist – between different creditors (e.g. multiple lenders) to whom a debtor (e.g. a borrower) owes some form of debt. Note that the terms “intercreditor agreement”, “intercreditor deed”, “subordination agreement”, “subordination deed” and “deed of priority” are sometimes used interchangeably, although in practice there may be distinguishing features between these types of documents (e.g. intercreditor agreements/deeds tend to be more complex than documents labelled “deed of priority”).
Investment agreement: depending on the circumstances, an “investment agreement” may be drawn up instead of a “shareholders’ agreement”. Investment agreements will typically include similar provisions to those set out in a shareholders’ agreement, as well as provisions relating to a specific investment or set of investments in the company.
Management warranty deed: a document used in an M&A context to set out any warranties that are being given to a buyer by the management team of the business being acquired.
Non-disclosure agreement: a non-disclosure agreement ("NDA") - also sometimes referred to as a confidentiality agreement - is designed to restrict and control access to and use of another party’s confidential information, including sensitive commercial information. Unilateral (i.e. “one-way”) non-disclosure agreements are designed to restrict and control one party’s access to and use of another party’s confidential information, whereas bilateral non-disclosure agreements (also referred to as “two-way” or “mutual” NDAs) involve the parties agreeing a series of mutual obligations around keeping one another’s information confidential.
Sale and purchase agreement (SPA): sale and purchase agreements (or “asset agreements”) are legal contracts that describe the outcome of key commercial and pricing negotiations and when signed, obligate a buyer to buy and a seller to sell. An SPA can be used to purchase either the assets of a company as part of an asset/business sale, or the shares of a company. In the latter case, you might hear the document being referred to as a “share purchase agreement”.
Share certificate: a certificate that is issued to shareholders – either in hard or soft copy – to prove that they are the certified owners of their shares. Share certificates should be issued by a company when a shareholder first acquires that company’s shares, be that directly from the company or via a transfer of shares from another individual or entity. Each share certificate issued will have a unique certificate number and will set out: the company’s details, the shareholder’s details, the type of shares that were issued, the date on which those shares were issued, the quantity of shares acquired, the nominal value of those shares and whether the shares are partly paid, fully paid or unpaid. Note that companies’ articles of association may include bespoke requirements relating to share certificates, so be sure to check these.
Shareholders’ agreement (SHA): a shareholders’ agreement is used to regulate the relationship between a company’s shareholders. This includes allocating specific rights, obligations and protections to shareholders and setting out various mechanics relating to share ownership, decision-making and the management of the company. Shareholders’ agreements should ideally be put in place when companies with multiple shareholders are first formed (as this is when shares are first issued), and certainly prior to a company securing any third-party investment.
Stock transfer form: a stock transfer form is a standard document required to effect the transfer of shares in UK companies. It contains details of the seller and purchaser of the shares, the type and number of shares being transferred and the consideration paid by the purchaser.
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