A Sale Agreement Ends with the Final Payment, Not the Signature

Summary: Selling a company ends not when you sign the contract, but when the final payment arrives and the shares are transferred. How you structure the months after signing (the point at which the definitive agreement is signed) matters as much as the headline purchase price.

USD figures are converted at KRW 1,450 = USD 1.

What arrived on the final payment date was not the payment but a corrected disclosure

A recent disclosure on the sale of management control of a domestic listed consumer goods manufacturer shows how much can happen between the day a contract is signed and the day the deal actually closes. This summer, the largest shareholder’s family entered into a share and management control transfer agreement to hand over a stake of around 30% to an investment partnership (an investment vehicle in the form of a partnership in which several investors pool money). The purchase price was just over $6.9m, and the deposit received on the contract date was less than 10% of the price. The remainder was to be received as the final payment about a month later, subject to satisfaction of the conditions precedent (conditions that must be met before the deal can close).

On the original final payment date, however, a corrected disclosure (a disclosure that amends and reissues the content of a previously filed disclosure) was filed instead. The original buyer had assigned its buyer status (the contractual rights and obligations held as the purchasing party) to another corporation, and the final payment deadline was pushed back to year-end. A little over a week later, the second buyer in turn assigned its status to a third buyer. The payment schedule also changed: in early November, roughly half of the price was to be received as an interim payment while just over half of the shares being sold were transferred, and by year-end the rest was to be received as the final payment while the remaining shares were transferred. Some reports said the buyer changed because the original buyer could not raise the final payment, but the disclosures do not state the reason for the change.

It is not yet known how this deal will end. Still, for an owner considering a sale, there are several points worth reading into.

Signing and closing are different events

Even after a share purchase agreement (SPA) is signed, closing (the point at which the price is paid, the shares actually change hands and the deal is completed) is possible only once all conditions precedent are met, such as confirmation of acquisition financing, approval by the general shareholders’ meeting or board of directors, and changes to key contracts. If the conditions are not met, the contract is terminated or the schedule is adjusted. Based on the disclosed schedule, the seller of this company received only the deposit, about 9% of the total price, for more than two months after signing.

People often think only of deals falling apart at the non-binding letter of intent (LOI) stage, but a deal can be shaken at any time even after a binding definitive agreement is signed. A definitive agreement only provides grounds for holding the counterparty liable if it fails to keep its promises; it does not guarantee that the money will actually come in. Even if the seller can forfeit the deposit or claim damages, what the seller wanted in the first place was probably not that money but the closing of the deal.

What it means when the counterparty changes

When first signing, a seller makes a judgment based on the buyer’s source of funds, acquisition purpose and post-acquisition plans. When buyer status passes to another company or partnership, the premise of that judgment disappears. Even if the price and number of shares stay the same, the party paying the price and the party running the company change. That is why it matters whether the contract has a clause prohibiting assignment of buyer status or requiring the seller’s prior consent, and a clause allowing the seller to demand fresh proof of funds from a new buyer.

The newly arranged payment schedule also shows mechanisms intended to protect the seller. The deposit and interim payment together amount to about 55–60% of the total price, and the shares transferred along with the interim payment are in a similar proportion. It reads as a structure in which shares are transferred only to the extent of the money received. However, for the roughly two months between the interim and final payments, the stake and management control may be split, so who runs the company and how during that period also needs to be set out separately.

Time tilts toward the buyer

From the moment of signing, bargaining power begins to tilt toward the buyer. Discussions with other prospective buyers stop, and the more time passes, the more psychologically committed the seller becomes to the sale. While the schedule slips, the company’s performance, employees’ morale and the way business partners view the company do not stand still. For unlisted SMEs and mid-sized companies, such changes are not even disclosed, so they are even less visible from outside, and if the deal falls through, the shock to the company can be greater.

What to check at the contract stage

• The source of the buyer’s funds and whether they are confirmed
• The size of the deposit, and how the deposit is treated if the contract is terminated due to the buyer’s fault
• How many times, and under what conditions, the final payment deadline can be extended
• Restrictions on assignment of buyer status and seller consent clauses
• Whether conditions the buyer must fulfill itself, such as a rights offering, are set as prerequisites for the final payment
• How shares and management control are transferred in parts when only part of the price has been received

Frequently asked questions

Isn’t the deal confirmed once the definitive agreement is signed?

No. Even after the definitive agreement, the conditions precedent must be met for the deal to close, and if they are not met, the contract may be terminated or the schedule adjusted.

If the buyer changes, what should the seller check again?

It is advisable to re-examine the new buyer’s source of funds and whether they are confirmed, as well as its acquisition purpose and post-acquisition plans, using the same standards as when the contract was first signed.