A share purchase agreement records the terms on which a buyer acquires existing shares from a shareholder. It sets out the price, conditions, completion requirements and allocation of risk.
A share sale agreement and a share purchase agreement generally describe the same type of document from different sides of the transaction. The drafting matters more than the label: both parties need to understand what must happen before ownership changes and which obligations continue afterwards.
What changes hands in a share purchase
The buyer acquires shares in the company. The company continues to own its assets and remain responsible for its liabilities, including obligations arising before the sale, such as tax, employee entitlements and unresolved claims. A share purchase therefore requires investigation of the company’s history as well as its current operations.
An asset purchase works differently: the buyer acquires the assets and rights specified in the agreement. A share subscription is also different because it involves the company issuing new shares, usually to raise capital. A transaction involving both existing and new shares needs documents that address each step.
Before drafting, check the company’s constitution and shareholders’ agreement for transfer restrictions, rights of first refusal and required approvals. Other shareholders may need to waive pre-emptive rights, and drag-along or tag-along provisions may bring them into the sale. ASIC explains how a company’s internal rules operate in its guidance on replaceable rules.
The shares and parties
The agreement should identify the buyer, each seller and the company whose shares are being sold. It should also specify the number and class of shares and whether any security or other third-party rights must be released.
The seller is often a family trust or holding company that will distribute the proceeds soon after completion. A buyer will usually ask the individuals behind that entity to guarantee the seller’s obligations, while a trustee seller will want its own liability limited to the trust assets. Who stands behind the warranties is as important as what they say.
If only part of the company is being sold, the parties also need to address how they will own and operate it together. That may require a new shareholders’ agreement covering decisions, further funding and future exits.
Purchase price and adjustments
The price provisions must explain how the amount payable is calculated, when it is paid and what can change it. An agreed headline figure may still be subject to adjustments for cash, debt or working capital. Most prices are agreed on a cash-free, debt-free basis with a normal level of working capital, so the definitions of cash, debt and working capital, and the target working capital figure, are often subject to further negotiations even once the headline price is agreed.
Where completion accounts determine an adjustment after the sale, the agreement should identify the accounting principles, who prepares the accounts, preparation process and dispute mechanism. A defined reference date and consistent treatment of individual items can reduce scope for disagreement.
The alternative is a locked box, where the price is fixed by reference to a recent balance sheet and the seller promises that no value has leaked to it or its related parties since that date. A locked box gives both parties price certainty at signing but moves the risk and reward of trading after the locked box date to the buyer.
An earn-out requires separate attention to the performance measure, accounting treatment and the buyer’s conduct of the business during the measurement period, including what happens if the business is sold, merged or restructured before the period ends. If a fixed part of the price is simply paid later, document the payment obligation, any right of set-off against it and any security supporting it.
Our term-sheet article explains why the proposed price structure should be addressed before the full agreement is negotiated.
Conditions that must be satisfied before completion
Conditions precedent identify matters that must occur before the parties are required to complete. These may include regulatory approvals, financing, third-party consents or agreed steps to resolve a due diligence issue.
A share sale does not automatically avoid consent requirements. A customer agreement, lease or finance document may contain a change-of-control clause that is triggered when the company’s ownership changes.
Where the transaction falls within the ACCC’s merger notification requirements, clearance must be addressed in the timetable and completion conditions. Foreign buyers may also need foreign investment approval. The agreement should also state who is responsible for satisfying each condition, whether it can be waived and what happens if it remains outstanding at the agreed deadline.
Warranties and disclosure
Warranties are contractual promises about the shares, company and business. They commonly concern ownership, financial records, contracts, employees, tax, intellectual property and compliance.
The seller’s disclosures can qualify those promises. They are usually made in a disclosure letter, with the data room disclosed generally as well. The agreement should state what constitutes disclosure and how it affects a claim. A broad reference to a data room requires careful consideration of what was available, when it was available and the level of detail needed to disclose an issue. The agreement should also say whether the buyer can claim for matters its own deal team knew about before signing.
For example, an email mentioning a customer dispute may provide less information than the buyer needs to assess its significance. The relevant claim, correspondence and proposed resolution may require specific disclosure.
Warranties should be assessed with their limitations. Financial caps, claim thresholds, time limits and exclusions determine the practical scope of the buyer’s protection and the seller’s continuing exposure.
General warranties are commonly capped at a percentage of the price, with the title and capacity warranties and the tax indemnity capped at the full price or uncapped. Claims usually need to exceed both an individual minimum and an aggregate threshold before the seller is liable.
Indemnities for identified risks
An indemnity can allocate responsibility for an identified liability. Unlike a warranty claim, an indemnity claim does not depend on showing the buyer relied on a promise or that the loss reduced the value of the shares, and it is often not qualified by disclosure. The wording should describe the covered matter, the loss recoverable, the claim process and any agreed limits.
If due diligence identifies a specific dispute, the parties may agree an indemnity dealing with its outcome and associated costs. They should also decide who controls the defence, whether a settlement requires consent and how information will be shared.
The buyer needs to consider who stands behind the obligation. A promise from a seller with limited remaining assets may require additional arrangements, such as a retention, escrow, a right of set-off against deferred payments or guarantee. Where W&I insurance is proposed, the policy and the agreement must be reviewed together to identify any uninsured exposure.
Conduct between signing and completion
If signing and completion occur on different dates, the agreement should address how the business is operated during that period. Buyers commonly seek protection against material changes without consent, while sellers need room to continue ordinary operations. A buyer may also seek a right to walk away if a material adverse change occurs before completion, although sellers resist these clauses and they are difficult to rely on in practice.
The parties should also address new information, changes to warranties and any right to terminate. Consent and information-sharing provisions must be drafted with relevant competition law requirements in mind; signing does not itself authorise the buyer to take control before completion.
Completion documents and company records
Completion brings together payment, share transfers and the agreed corporate steps. Depending on the transaction, the documents may include board resolutions, security releases, resignations or appointments, and evidence that required consents have been obtained. Signed share transfer forms, the existing share certificates and new certificates are also needed, and the register must be updated for the transfer to take effect.
The company’s own register must reflect the transfer. ASIC’s members register guidance explains the records companies must keep. The company must also make applicable notifications of changes to shareholdings within the required period.
Sellers should also use completion to obtain releases of any personal guarantees they have given for the company’s lease, bank facilities or supplier accounts, and to repay or settle any director loan accounts.
Completion should also deal with practical access to company records and systems through authorised transfers of control. Any continuing assistance from the seller should have a defined scope and duration.
Restraints to protect the business
A buyer may seek restraints to protect the goodwill it is acquiring, including restrictions on the seller competing with the business or soliciting its customers or staff. The agreement should identify who is bound, the activities restricted, the period and any geographic area. Enforceability depends on the applicable law and circumstances; a broader restraint is not automatically more effective. Courts enforce a restraint given by a seller of goodwill more readily than one given by an employee, but only to the extent reasonably necessary to protect the goodwill purchased.
Obligations after the sale
The agreement may continue to govern adjustments, deferred payments, warranty claims, confidentiality and restraints. If the seller remains as a director, employee or shareholder, the related documents should be consistent with those obligations.
Before signing, both parties should be able to identify what remains payable or required after completion and the deadlines attached to it. Those details can materially affect the value and certainty of the agreed transaction.
Resolving disputes
The agreement should state the governing law and how disputes are handled. A technical dispute over completion accounts may be referred to an independent accountant acting as an expert, whose decision is usually final apart from manifest error, while other claims may require negotiation, mediation or court proceedings. Check that the procedures, notice requirements and time limits work together, including where urgent relief may be needed.
Our mergers and acquisitions practice advises private company buyers and sellers on share purchase agreements. Contact Rouse Lawyers to discuss the proposed terms or arrange a review of a draft agreement.
Disclaimer
The information contained on this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved.
Accordingly, the information on this site is provided with the understanding that the authors and publishers are not providing legal advice. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult with a professional lawyer from Rouse Lawyers.
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