What is a Share Sale?
A share sale differs from the sale of a business or its assets. In a share sale, the existing shareholders transfer ownership of a company by selling their shares. The buyer acquires both the company’s assets and liabilities and takes over the company entirely. In contrast, a business or asset sale transfers specific assets (plant, equipment, stock, goodwill, etc.) to the buyer, who does not assume the legal entity or historical liabilities. The sale may also include intellectual property and assignment of third-party contracts to the buyer.
Preparations
Before negotiations, sellers should ask potential buyers to sign a confidentiality (non-disclosure) agreement. This protects confidential company information from unauthorised disclosure during discussions.
A heads of agreement can also help. This preliminary document clarifies points of agreement, identifies areas needing further negotiation, and serves as a reference when drafting the final share sale agreement. Always have a legal practitioner review any heads of agreement before signing.
Typical Provisions
Share sale agreements include provisions that protect both buyer and seller.
The agreement should define the purchase price and outline payment methods such as instalments, escrow, or holdbacks. It should also address adjustments or earn-outs based on future business performance.
Sellers usually provide assurances regarding the company’s financial condition, assets, and liabilities. Representations and warranties ensure accurate information and play a key role in risk allocation. Agreements often include indemnity clauses for potential losses from undisclosed liabilities or breaches. Limitations of liability provisions set caps or time limits on the seller’s responsibility.
The agreement may include conditions to complete the sale, such as obtaining regulatory approval or third-party consent. It should outline post-completion obligations, like transferring licences, contracts, or assisting with the transition of employees and customers.
Provisions may also restrict the seller from competing with the business, soliciting employees or customers, or disclosing confidential information. Other post-completion obligations may include transition support and customer or employee notifications to ensure a smooth ownership transfer.
Due Diligence
Buyers must conduct comprehensive due diligence to identify potential risks, liabilities, or issues with the business. This process informs negotiations and decision-making.
Buyers must review representations and warranties to ensure accuracy and proper risk allocation. Sellers must provide all necessary information and disclosures, maintain transparency, and reduce the risk of disputes after the transaction.
Seek Professional Assistance
Share sales are complex and require careful preparation and due diligence. Experienced commercial lawyers can guide negotiations, draft agreements, and protect your interests. Tax and accounting experts can also provide advice to structure the deal advantageously.
Engaging your professional team early helps steer negotiations, flag missing information or issues, and allows sufficient time for due diligence.
This is general information only, and you should obtain professional advice relevant to your circumstances. If you or someone you know wants more information or needs help or advice, please call 02 9150 6991 or email ad***@**********om.au.