The agreement for the sale of shares or quotas must be classified as a sale agreement and the provisions of the civil code relating to the sale must therefore be applied (articles 1476 et seq. Of the civil code).
A fundamental element of the contract for the sale of shares or quotas is the price and its determination.
In negotiations for the purchase and sale of shareholdings in non-listed companies, there is no “right” price for the shareholding in absolute terms that expresses its exact value or an absolute criterion with which to determine it. There is only the price that the contractors decide by consensus to assign to particular participation at the time of conclusion of the contract.
In principle, a shareholding expresses the value of the company as a percentage, so for example, if you buy 30% of the shares of a company that is worth a total of 1 million euros, the price will be equal to 300 thousand euros.
Again theoretically, if the contractors had all the necessary information and skills available to correctly estimate the company, the final price should derive from the value of the company as a reality photographed by the analyzes carried out (due diligence) and from the greater value that the buyer expects to achieve in the future and is willing to recognize the seller.
Let’s say that the basic criterion for determining the price of shares or shares is the value of the company’s net assets, which consists of the difference between the assets and liabilities of the balance sheet.
But the seller is unlikely to be satisfied with receiving the pro-quota price corresponding to the company’s equity. In fact, as a rule, he will require an additional sum that corresponds to the future profits of the company, calculating a multiple of the profits produced by the company in the last financial year or the average of the profits achieved in the last 2/3 years.
Furthermore, it must be considered that whoever sells a majority stake will demand a “majority premium”, as the shareholding they sell allows the buyer to control and, therefore, manage the company independently.
It is important to ask the seller for the latest available financial statements of the company, which show the company’s net assets and profits, and, if months have elapsed since the filing of the financial statements, also interim financial statements.
In certain sales contracts, the price of the shareholding in the company is determined on a fixed basis (for example 300 thousand euros), or can only be determined on the basis of criteria that allow the price to be established. Sometimes, even the payment of the price is deferred or eventual, if linked in part to the future profits of the company earn-out. Let’s analyze them.
Usually, the fixed price is used (for example: ” the price is set at 300 thousand euros … “) when the value of the investment is not very high, or when recent balance sheet data are used to establish the price which should not undergo strong variations between the moment of the conclusion of the preliminary contract and the completion of the sale.
However, it must be pointed out that the indication of the fixed price in the sale contract does not allow the buyer large margins of protection. In fact, it does not specify on the basis of which objective and provable data the price was determined and, therefore, it will be difficult for the buyer to contest judicially that the price paid does not conform to the actual value of the shareholding.
To protect the buyer, it is, therefore, preferable to specify the criteria that determined the price in the acquisition contract. For example, it could be envisaged that ” the price established between the contracting parties is equal to 300 thousand euros and consists of the sum of the company’s net assets (200 thousand euros) and double the profits made in the last financial year (100 thousand euros’ euro) “.
As anticipated, by the determinable price we mean that price that is not expressed in a fixed measure but only the criteria that determine it are expressed.
The criteria to be adopted can be different: equity, income, mixed equity-income, financial, market multiples, etc.
In addition to these criteria or in addition to them, it is also possible to provide a minimum price and a maximum price, in the interest of the seller and the buyer respectively, simultaneously establishing a termination of the contract (automatic or activated by those who have an interest) that avoids having to pay a price that does not fall within the minimum and maximum limits established.
Usually in contractual practice, the determinable price is used if there is a considerable amount of time between the signing of the preliminary contract and the definitive one (in which the buyer will have to pay the price).
In some cases, the acquisition of the participation is arranged in such a way that the buyer pays a part of the price at the time of the transfer of the participation, while the residual payment of the price is possible and postponed, subject to conditions.
The most common clause, the so-called earn-out clause, is the one that allows the payment of a part of the price to be made conditional on the achievement of certain objectives (which may be the achievement of certain profits, or the winning of an important dispute, the acquisition of a large contract, etc.) which must be completed within a certain period of time.
This type of agreement has advantages for both the seller and the buyer:
– the buyer will have a lower immediate financial burden
– the seller will find it easier to sell his shareholding immediately on the market, as the price to be paid at the time of completion of the sale is lower than what would otherwise be immediately due.
However, it must be considered that after the acquisition the buyer could try, with accounting tricks, to make a particularly low profit, in order to reduce the share that is required to sell to the seller.
Therefore, great care must be taken in drafting such an earn-out clause. In these cases, it is advisable to ask for the collaboration of accountants and/or auditors. It is recommended that the clause clearly indicate the criteria for measuring profits and the method of distribution among shareholders. Furthermore, it is necessary to identify the period of time within which the seller is entitled to receive a part of the company’s profits (for example 2/3 years), which could give rise to the need to keep the seller in the administration/management of the company. which is regulated within the Statute.
Documents that may be useful to you
- Preliminary Contract for the Sale of a Company: to stipulate the definitive contract for the sale of a company (or a company branch) by a certain date
- Company or Business Branch Rental Agreement: to transfer the management of the business or part of it to another subject in exchange for a fee
- Shareholders’ Agreements: to regulate relations between shareholders
- Confidentiality Agreement: to ensure that confidential information is not disclosed
- Letter of Intent: to establish the points on which the parties have already reached a general agreement