M&A: Considerations for Partial Stake Acquisition

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Thinking about acquiring a partial equity stake in a company? Beware, it’s not as straightforward as you might think!

If you are a buyer acquiring a partial equity stake in a company, beware that this gives rise to more issues than an acquisition of the entire issued shares in the company. There are a few safeguards you should consider putting in place, especially if you are not acquiring shares from all of the shareholders of the company.

A buyer of a partial equity stake in a company should consider the following:

1.      Conduct due diligence

Check whether the company has adopted a constitution and whether there is any shareholders’ agreement entered among the current shareholders.

Examine the company’s constitution and any existing shareholders’ agreement for the following restrictions:

🔹 whether sale of shares is subject to right of first refusal by other shareholders

🔹 whether other shareholders have the right to tag along in the sale

🔹 whether approval of the board of directors or shareholders is required for the sale.

🔹 whether the directors have the right to refuse or delay transfer of shares

🔹 whether the buyer is required to adhere to the existing shareholders’
agreement and if so, what are the terms of the existing shareholders’ agreement.

2.      Safeguards in sale and purchase agreements

The sale and purchase agreement should provide for the relevant conditions precedent, closing conditions, representations and warranties by the seller and waiver of right of first refusal by the remaining shareholders to address the restrictions stated in point 1.

3.      Have a shareholders’ agreement

No matter how friendly the other shareholders are, it’s prudent to have a shareholders’ agreement which binds all shareholders after completion of the acquisition.

Where there is already a shareholders’ agreement before the buyer acquires its partial stake, the buyer may be required to accede to the existing shareholders’ agreement, which brings us to point 1 👉conduct due diligence first.


This post first appeared on LinkedIn on 1 September 2023.

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