A sale of business agreement invariably deals with the purchase price, assets and liabilities being transferred, and the method of payment. There are, however, matters sometimes overlooked which are crucial to include in the agreement to ensure both compliance with statutory obligations and protection for the parties. Bear these in mind:
- Vat Zero Rating
The sale of a business qualifies as a “supply” as contemplated in the VAT Act. In terms of section 11 of the VAT Act, such supply may be subject to a VAT rate of 0%, provided it meets the following requirements –
- both parties must be registered as VAT vendors at the time of supply;
- both parties must agree in writing that the business is disposed of as a going concern. The subject matter of the sale must be an income-earning business (or part of a business), which is transferred as a functional unit to the purchaser and capable of separate operation;
- both the seller and purchaser must agree in writing that the business is an income-earning activity on the date of transfer;
- all of the assets necessary for the business to continue its income earning activity after the date of transfer must be disposed of;
- the sale of business agreement specifically stipulates that the purchase price includes VAT at 0%.
Should the parties to a sale of business agreement wish to benefit from the zero rating, it is vital that the agreement complies with each of these aspects.
- Section 34 of the Insolvency Act
This section requires a “trader” (as defined in the Insolvency Act) to publish statutory notices that it is transferring its business. The object of such notices is to protect the seller’s creditors by alerting them to the sale and giving them the opportunity to institute action against the seller before the transfer is effected.
The timing requirements for such notices are very specific and require careful planning from a transactional timeline perspective. The timing of publication often creates a complication where parties are keen to have the transfer and payment occur by specific dates. As such, parties sometimes choose to dispense with publication. This needs to be carefully considered. Failure to publish exposes the purchaser for a period of 6 months after the transfer within which it is possible for the seller’s creditors to pursue the assets of the transferred business in the hands of the purchaser to secure payment of their claims against the seller. There is also the possibility of the transaction being treated as void after this period, should the seller go into liquidation. If a purchaser does agree to dispense with publication under section 34, the sale agreement needs to incorporate protections should any creditors of the seller seek to attach the assets acquired by the purchaser.
- Section 197 of the Labour Relations Act (“LRA”)
Section 197 of the LRA provides that, where a business is transferred as a going concern, the employees working in such business automatically transfer with the business and become employees of the new owner. Accordingly, the purchaser inherits obligations that the seller, as old employer, had towards such employees, including unpaid salaries, accrued leave and unpaid bonuses, and other benefits in terms of their existing employment contracts.
Whilst the transfer of the existing contracts of employment will occur automatically in terms of section 197(7), section 197(6) permits the parties to agree, in the alternative, to negotiate new terms and conditions on which the transfer will occur or even that no transfer will occur. Such an agreement must be concluded between the old employer, new employer and any party that would need to be consulted had a retrenchment procedure occurred. Such alternative terms and conditions must on the whole not be less favourable to the employees than those on which they were employed in terms of the existing contract of employment.
Since section 197 renders the old and new employer jointly and severally liable in respect of the employee obligations, it is of fundamental importance that the seller and purchaser contractually agree their respective liabilities in this regard.
- Warranties
Even the most thorough due diligence investigation may fail to uncover issues which can result in future liability or give rise to losses for the purchaser of a business. As such the agreement must include warranties in favour of the purchaser, effectively guaranteeing that the facts stipulated in the warranties are correct. Warranties serve to mitigate risk for the purchaser by providing a financial recovery mechanism if a warranty turns out to be untrue.
The mechanism for compensating the purchaser for breach of a warranty may be compensation in the form of damages or an adjustment to the purchase price.
The seller may in turn protect itself against warranty claims by making clear disclosure against the agreed warranties. The agreement will in such instance provide that the scope of the relevant warranty is limited by the disclosure made.
The seller may further protect itself by including a clause which specifies limits on its liability for breach of a warranty. Such a clause may limit the quantum a purchaser may recover or set a time period within which a purchaser must claim to recover.
