Understanding share sale agreements is essential for corporate clients navigating the sale of shares in Australian businesses. Investors and entrepreneurs should familiarise themselves with typical provisions found in share sale agreements. They should also be aware of important considerations and best practices in a share sale transaction. Seeking the guidance of an experienced lawyer is crucial in protecting their interests and achieving a mutually beneficial outcome.
What is a Share Sale?
It is important to distinguish between the sale of shares and the sale of a business or its assets. In a share sale, ownership of a company is transferred by selling the shares held by the existing shareholders. This means the buyer acquires both the assets and liabilities of the company. The buyer takes over the company in its entirety.
In contrast, a sale of a business or assets involves selling specific assets (plant, equipment, stock, goodwill, etc.) to a buyer. The buyer does not assume the legal entity or historical liabilities of the business. However, the sale may include the transfer of intellectual property and the assignment of third-party contracts to the buyer.
Preparations
Before entering negotiations for a share sale, it is good practice for the seller to require a potential buyer to enter a confidentiality (non-disclosure) agreement. This protects confidential company information exchanged during discussions. It prevents unauthorised disclosure by the prospective buyer.
A heads of agreement may also be used. This is a preliminary document prepared before the parties enter into a final agreement. It helps the parties clarify points of agreement. It also identifies areas for continued negotiation. It provides a reference when drafting the final share sale agreement.
It is important that a legal practitioner reviews any document, including a heads of agreement, before signing.
Typical Provisions
Typical provisions in a share sale agreement protect the interests of both the buyer and the seller.
The agreement should clearly define the purchase price. It should include appropriate payment mechanisms, such as instalments, escrow arrangements, or holdbacks. These help ensure a smooth and fair transaction. It may also include adjustments or earn-out arrangements based on future business performance.
The seller usually provides assurances in the share sale agreement regarding the company’s financial condition, assets, and liabilities. These representations and warranties establish the accuracy and completeness of information provided. They also allocate risk between the parties.
Share sale agreements often include indemnity clauses. These clauses allocate risk for losses arising from specific events, such as undisclosed liabilities or breach of warranties. Limitation of liability provisions set caps or time limits on the seller’s liability.
The agreement may include conditions that must be met before completion, such as regulatory approval or third-party consent. It may also set out post-completion obligations. These include assisting with the transition, transferring licences or contracts, and managing customer or employee relationships.
In addition, provisions may restrict the seller from competing with the business, soliciting employees or customers, or disclosing confidential information after completion. The agreement may also include further post-completion obligations to support a smooth transition of ownership.
Due Diligence
When negotiating share sale arrangements, buyers should consider key risks and issues. The buyer should undertake comprehensive due diligence. This helps identify potential risks, liabilities, or issues associated with the business. It also supports informed negotiation and decision-making.
The buyer is responsible for reviewing representations and warranties. These ensure they accurately reflect the state of the business and allocate risk appropriately. The seller must provide accurate information and disclosures. This supports transparency and reduces the risk of post-transaction disputes.
Seek Professional Assistance
A share sale is a complex process that requires careful preparation and detailed due diligence. An experienced commercial lawyer can guide the negotiation and drafting process. They help protect your interests while ensuring legal requirements are met.
Expert advice is often needed to understand tax implications. Buyers should seek advice from tax and accounting professionals. This helps structure the deal effectively.
Engaging your professional team early helps guide negotiations. It helps identify missing information or risks. It also allows sufficient time for due diligence.
This is general information only and you should seek professional advice relevant to your circumstances. If you or someone you know wants more information or needs help or advice, please contact us on 07 5576 9999 or email [email protected].
