Importance of the "Title-Chain"
At the latest in the context of an M&A process, namely when selling shares in a company, a potential buyer will ask the question: "Is there a complete Title-Chain?" This is the case if the seller can prove that the shares were validly transferred to him by their previous owner(s), respectively that these previous owner(s) also received the shares validly transferred, etc.
Only if this chain of transfer, in technical language the "Title-Chain", can be proven without any disruptions up to the incorporation of the company, there is satisfactory proof for the buyer of the seller's ownership position. If even one transfer within this chain has not been legally valid, all subsequent transfers are void and the seller is therefore not the owner of (all) the shares to be sold.
How does a legally valid transfer of shares take place?
If share certificates have been issued, on the one hand the original of the share certificate must be physically handed over to the acquirer and on the other hand the transfer must be confirmed by means of a handwritten signature, whereby such so-called endorsements are usually located on the reverse of the share certificate.
Companies often do not issue physical share certificates.. If this is the case, such uncertificated securities in the shares are recorded in the share register of the company. In order to transfer ownership of such uncertificated securities, a hand-signed assignment agreement is required in addition to the purchase agreement.
In any case, the transfer of shares must be notified to the Company, in order to update the corresponding entry in the Company's share register and to obtain the approval of the board of directors in the event that the share transfers are restricted by the articles of association.
What to do if written assignments were forgotten in the past?
If disruptions in the Title-Chain are identified during due diligence, i.e. the legal review of the company by the buyer, this can result in uncertainty on the part of the buyer or even in renegotiations, often disadvantageous for the seller, of the parameters set out in a "Letter of Intent" at the beginning of the sales process.
In order to avoid such unpleasant surprises, the Title-Chain should be analyzed by the seller himself before the start of the actual sales process. For this purpose, the seller must obtain all available documents relating to past transfers of the company's shares. These documents must then be analyzed to ensure that the above-mentioned requirements for the legally valid transfer of shares have been met.
If the seller identifies that the Title-Chain cannot be fully confirmed, the following four basic options arise:
- In the event of a disruption in the Title-Chain, ownership remains with the person who has not legally assigned the shares. If this person can be identified and contacted, it is possible to execute the missing assignment and thus remedy the disruption in the Title-Chain.
- If the aforementioned remedy of the disruption is not possible, the seller is left with the option of presenting the situation to a possible buyer in a structured and plausible manner. Usually, a risk analysis is also carried out to determine the probability of claims being asserted against the shares by a previous owner. The risk is then processed in the contract through appropriate warranties and/or indemnifications.
- If the risk is deemed too high to be contractually regulated within a sales process, a so-called asset deal can be considered, in which a buyer acquires not the shares but all or part of the assets and liabilities of the company.
- If an asset deal is not an option for the buyer, the seller is left with certain restructuring measures to minimize the risk before the sale.
MME's corporate law team will be happy to advise you on all issues and measures related to the sale of your company.
We look forward hearing from you.
