As an aspiring business owner, you may be considering buying shares in a company. You will be either buying all of the shares in the company (in which case you are the sole owner of the company) or buying some of the shares in that company (where you end up holding a certain percentage of the company). When buying shares in a company, you will enter into a share purchase agreement with the selling shareholder, which outlines the terms and conditions of the purchase. This article will outline key terms to include in a share purchase agreement.
Price and Payment
A key term of the share purchase agreement will be the number and price of the shares you are buying and how you pay for them. The purchase price may be an agreed fixed sum price or be subject to amendment after completion of the sale (for example, including a mechanism adjusting the final purchase price, which is dependent on business performance for a certain period of time after completion of the sale).
The share purchase agreement may provide for payment of the full amount on completion or allow for payment in instalments over a period of time (particularly common when an adjustment applies). Certain amounts may also be withheld or held “in escrow,” pending satisfaction of certain agreed conditions post-completion. This is an important protection for purchasers to ensure that they are, in fact, paying value for the shares.
Conditions Precedent
Conditions precedent are certain matters that are critical to the purchase that the purchaser must meet before the sale goes ahead. Failure to satisfy a condition can give the other party the right to abandon the sale without liability. The agreement will likely set a specific timeframe within which you must meet the conditions (to give both parties certainty as to whether the sale will proceed). Conditions may include:
- regulatory and government approvals, for example, Overseas Investment Office (OIO) consent;
- delivery of certain documents, such as a founder intellectual property (IP) assignment agreement assigning all critical IP relating to the business from the founder to the company;
- consent to an assignment of the lease for the premises where the business is run; and
- consent to an assignment of key commercial contracts of the business.
Representations and Warranties
Representations and warranties are certain statements given by both parties of matters agreed to be true (and on which the other party can rely). These are typically heavily negotiated and reflect an agreed allocation of risk between the parties. If a representation or warranty is subsequently found to be untrue, the other party can take legal action. Often the seller’s representations and warranties will be more extensive than the buyer’s and may include statements in regards to:
- accuracy of company records;
- confirmation of legal compliance;
- accuracy and timely filing of tax returns;
- confirmation of ownership of IP;
- confirmation that the assets subject to the sale comprise all assets required to run the business; and
- confirmation of title to the shares and capacity to sell.
Representations are factual, and you give them to persuade the other party to enter into an agreement. Therefore, it will precede the share agreement and can help you decide whether to buy the shares or not. Alternatively, a warranty is a guarantee to assure you that whatever is promised will be executed. Often warranties come with indemnification in case a representation turns out false.
Representations and warranties you, as a buyer, may be expected to provide include:
- authorisation to enter into the agreement;
- your compliance with all relevant laws;
- solvency as of the closing date; and
- litigation issues or lack thereof.
Indemnification and Non-Compete
Most share purchase agreements will include an indemnification clause that specifies who bears the liability for losses due to misrepresentations and warranty breaches. The clauses should consist of:
- how claims can be made;
- how claims are processed;
- limitations to payment and liability; and
- process of payment.
The clause should also indicate what it applies to. People who purchase shares often want the remedy to apply to other causes of actions such as covenants, seller liabilities, and products.
A non-compete provision is vital in scenarios where you are buying all of the shares in a company. The non-compete restricts the seller from competing with the business and soliciting employees or customers for a specified time after the closing date.
Termination Rights
A termination clause allows either party to terminate the agreement before it closes. This term should detail how you can execute termination, such as:
- by written consent of all parties;
- by a party’s material breach of warranty or representation; and
- a party failing to complete its closing conditions by the specified date.
Confidentiality
Your agreement should have a confidentiality clause that binds both parties from disclosing information about the share purchase to third parties unless authorised. Often this protection may come from a pre-existing non-disclosure agreement (NDA). An NDA can include:
- definition of confidential information;
- exceptions to confidential information;
- a non-compete provision;
- covenants; and
- consequences for breaching confidentiality.
To protect your business, ensure supplier contracts meet your business’ needs. Our free Commercial Contracts Checklist will help.
Key Takeaways
When buying shares in a company, you should carefully review the share purchase agreement and ensure that you include the above key terms at a minimum and reflect your understanding of the key commercial terms agreed with the seller.
If you need help purchasing shares in a business, you can contact our experienced contract lawyers to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.
Frequently Asked Questions
An indemnification clause specifies who bears the losses due to a breach in the agreement.
Key terms typically included are in regards to price and payment terms, conditions precedent, representation and warranties, indemnification clauses, termination, and confidentiality.
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