Buying or selling shares in a company is an exciting financial opportunity. As with any significant business transaction or agreement, when it comes to buying or selling shares, it is imperative that a share sale agreement or share sale contract is entered into.
This critical agreement ensures that the proper process has been followed so that the transaction is legally binding, and also that all parties are in agreement when it comes to the terms of the deal.
Regardless of which side of the transaction you are on, the buyer of the shares or the seller, it is recommended that you seek independent legal advice to ensure that the document itself is correctly prepared, that you are fully aware of your obligations under the share sale contract and are able to make a well-informed decision.
Whilst it is important to seek professional advice, here are some key considerations to be aware of when creating an agreement, or contract, for the sale or purchase of shares in a company.
Considerations when Creating a Share Sale (or Purchase) Agreement
1. Outline the Details of the Shares to be Transferred
During the initial conversations and subsequent negotiations regarding the share transaction the parties will no doubt discuss details such as the share sale price and the number of shares to be bought or sold.
It may seem obvious, but it is important to ensure that these details are accurately represented in the agreement documentation. Not only does this serve to confirm the details of the impending transaction for those involved, but it also can be of assistance as an accurate reference in the future, should any misunderstandings or disputes happen to arise.
2. Clarify Title, Property & Risk
It is important to clearly specify within the share sale contract when title, property and risk will pass from the seller to the purchaser. This will be useful in establishing who will be liable if any legal breaches occur.
It is common for a buyer to take on all of the risks and liabilities that are attached to becoming a new company shareholder. For this reason, it is wise for buyers to comprehensively research all aspects of the company that they are seeking to purchase shares in so that they can be well aware of exactly what they are entering into and any potential issues can be identified before it is too late. This research process is called due diligence and looks into many aspects of the business in question.
Due diligence is carried by experienced professionals to ensure that all facets of the company have been well-considered. It looks at not only the current financial position of the business, but also historical and future performance as well as other business factors such as operational, legal and wider industry and economical factors, to accurately assess the risk and potential for the business.
Due diligence is widely used when reviewing a business for potential purchase, but it serves exactly the same purpose, and is just as important, when it comes to assessing a company that you are interested in purchasing shares in.
It would be extremely risky, and ill-advised, to enter into an agreement to purchase shares in a company without first conducting a due diligence review.
3. Know the Rights & Obligations of Both Parties
Both the seller and purchaser should be clear as to their respective rights and obligations when it comes to every stage of executing the share sale contract. That means knowing what is required of them before, during and after the agreement is finalised.
An example of some such rights and obligations might be:
- the purchaser would expect the vendor to manage and conduct the business with care and maintain the profitability and value of the business.
- on completion of the agreement, the seller should hand over and complete relevant documentation to give full effect to the sale.
4. Maintain Confidentiality
It is likely to expect that sensitive information will be shared between parties throughout the share sale process. Including a confidentiality clause in the agreement will ensure that any sensitive information that is disclosed during the process will not be disclosed to other parties for any reason.
In certain circumstances, you may choose to enter into a confidentiality agreement in the initial stages of discussion and negotiation.
5. Seller to Provide Warranties
Warranties are promises or representations made by the seller to the buyer in order to guarantee or substantiate the value of the shares that are to be sold. Such warranties may include that the seller has disclosed all relevant matters at the time of sale.
Warranties given by the seller to the buyer are often extremely important to the success of any share sale. It is also important to note that if the seller breaches a warranty, it may allow the buyer to claim damages or walk away from the sale.
6. Buyer to Insist on Indemnity
The indemnity clause is essentially a promise by the seller to compensate the buyer for any loss or damage they might be subject to as a result of a third party. For the share purchaser, it is essential that an indemnity clause is included in the share agreement.
7. Setting Restraint Conditions
In the situation that the purchaser is acquiring a substantial share of a business, it would be less than ideal for the seller to subsequently establish a similar business near you and essentially become your competition. They might engage in activities such as soliciting customers and/or suppliers, among other things. Including specific restraint conditions in the share sale agreement – such as type of business, location, and timeframe – ensures that the newly acquired business can continue to operate and thrive without needing to be concerned about the potentially negative actions of the seller.
Expert Share Sale Contract & Due Diligence Advice
As outlined above, there are many facets to be considered when it comes to preparing an accurate and concise share sale contract, that protects the interests of all involved.
Buying and selling shares in a company is a great opportunity for both parties but it is definitely not something to be entered into lightly.
Seeking professional advice from the very beginning will give you the best chance of achieving a successful outcome.
The team of expert advisors at Quinn M&A can work with you through all facets of the share sale and purchase process. From initial discussions and due diligence to drafting contracts and finalising agreements.
Submit an online enquiry or call us on + 61 2 9223 9166 to arrange an appointment to discuss your individual share sale contract requirements.
