A share sale agreement sets out the terms on which shares in a company are to be sold. Although there is no standard form share sale agreements tend to cover the same general territory, as explained below.
The two types of share sale agreement
There are two types of share sale agreement. The first is where all of the shares in a company are being sold. The second where is only some are being sold. This article explains the basics for both types of agreement.
What does a share sale agreement cover?
A share sale agreement will usually contain provisions that address the following:
- Price & Payment;
- Conditions Precedent to the Sale (being conditions that must be satisfied before the sale can be finalised);
- Completion Arrangements*;
- Warranties & Indemnities;
- Restraints and non-competes*; and
- Miscellaneous other provisions.
The items marked with an asterisk (*) are more common where all of the shares in the company are being sold.
What is not covered?
If only a portion of the company’s shares are being sold, and not all of them, the buyer would normally be required to enter into a shareholders agreement with the existing shareholder(s). This is usually done through a deed of accession (where the buyer will be bound by an existing agreement), or by creating a new shareholders agreement.
The shareholders agreement explains how the relationship will work after the sale has occurred. You can read more about shareholders agreements here.
Most of the time, a share sale agreement is not the document that effects the transfer of the shares from the seller to the buyer. That is normally done through a separate document, being a one page share transfer form. Whereas the share sale agreement sets out the terms of the sale, the transfer is the instrument that evidences the transfer and which the company will rely on to register the change in ownership.
Sometimes completion of the sale will occur when the share sale agreement is signed, and sometimes it will occur later. (Completion is the point in time when the shares are transferred.)
Where the seller is required to do certain things before the sale can be completed, completion often takes place several weeks after the agreement is signed.
Regardless of when completion is planned, the agreement will normally explain when completion will occur and what the parties are expected to do at completion.
For example, the seller would normally be required to provide a signed transfer form and any share certificates (or a statutory declaration that none exist), and the buyer will be required to pay all (or most) of the purchase price.
Various other things happen at completion and shortly afterwards, such as the signing of corporate resolutions and the filing of any necessary ASIC notifications.
Warranties & Indemnities
Aside from the price and payment terms, the warranties and indemnities are probably the most important parts of the document.These clauses give the buyer certainty around what they are buying.
Warranties and indemnities in a share sale agreement cover a range of areas, including:
- Title – that the seller owns the shares and has the right to sell them.
- Share capital – that the company’s share capital is as promised by the seller.
- Business warranties – effectively, that there is nothing that has not been disclosed to the buyer that could materially affect the value of the shares being sold.
The warranties in the last category can address a number of different aspects of the business. For example, there will often be warranties about the company's accounts, tax, its assets, its key contracts, that there is no litigation, that the sale of shares will not breach any contracts, and so on.
Although it is normal (and advisable) for a buyer to seek warranties and indemnities from the seller, it is also normal (and advisable) for the seller to seek to qualify them. (You can read about our tips for buyers here, and our tips for sellers here.)
Restraints & Non-Competes
Where all of the shares in the company are being sold, the agreement will normally contain provisions designed to prevent the seller from:
competing with the business;
attempting to poach employees from the business; and
attempting to divert customers away from the business.
As a general rule, restraints and non-compete clauses will not be enforceable if they go further than is necessary to protect the value of the shares being sold. The most relevant considerations are the nature of the conduct being restrained, the duration of the restraint and the geographic reach of the restraint (ie where and how big is the area in which the restraint obligation applies).
Miscellaneous Other Provisions
This article summarises the main types of provisions you are likely to find in a share sale agreement, but obviously there will be others, including provisions that are specific to your circumstances.