Compared to buying assets, taking over a company and its business by purchasing shares can make the handover much easier.

This is because the underlying contracts with existing clients, suppliers and employees remain unchanged.

However, risks still exist. Buying a company is never as simple as agreeing on a price.

As a buyer, there are several important documents and steps to ensure you obtain lawful ownership of the shares, and the most important document is the share sale agreement.

Today we will discuss the essential documents required when purchasing shares in a company.

Share Sale Agreement

When you purchase shares in a company, the share sale agreement will be the longest and most detailed document you have to deal with. While the other documents in the transaction are also necessary, you should direct most of your attention and effort to this document. All too often, people make the mistake of rushing through it.

A carefully drafted share sale agreement should include the following:

– The number of shares you will purchase

– The purchase price of the shares

– Whether it is a one-off purchase or paid in instalments

– Whether there are any additional conditions, such as the owner’s consent being required to complete the sale

– Completion obligations at the time of legal transfer of ownership

– The full set of promises (also known as warranties) the seller must provide regarding the shares, the business and the company

– A non-compete covenant preventing the seller from operating a similar business after completion

– Confidentiality and dispute resolution clauses

Negotiation

Typically, the seller’s lawyer will draft the agreement and your lawyer will review it.

During negotiations, your lawyer’s role is to strike an appropriate balance between the seller and you (as the buyer). The seller’s lawyer will usually draft a share sale agreement that is highly favourable to the seller. You should therefore be prepared for several rounds of negotiation, which may take anywhere from a few weeks to a few months. An experienced lawyer will guide you through this process and explain the key legal points.

An experienced lawyer will guide you through this process and explain the key legal points.

The most heavily negotiated issue is usually how the parties will handle any future breach or dispute. This includes restrictions on the seller, such as situations where a particular warranty given at the time of sale turns out to be untrue, and how much time you have to bring a claim.

Most agreements include a standard set of template warranties. However, the most important matters are actually certain business-specific issues that you need to investigate yourself through due diligence. For example, a seller’s claim to have no knowledge of why clients have been leaving is well worth scrutinising closely.

Due Diligence

Buying all of the shares in a company means taking on the risks associated with the company’s past dealings. This may include debts owed to the Australian Taxation Office or work still owed to clients.

The first step in protecting yourself is to conduct due diligence on the company.

This involves both legal and financial due diligence.

Your legal team can carry out searches on the company and review its key contracts. For example, you should ensure the contracts are satisfactory, so as to lock in the retention of key clients.

Your accountant or financial adviser can review the company’s financial records and provide you with detailed information on:

– The value of the business;

– Risks relating to tax, wages and superannuation

Due diligence may take place either before or after you sign the share sale agreement. If it takes place afterwards and you discover something unsatisfactory, the agreement should contain clauses allowing you to exit the transaction. You can also address any risks identified by adding further warranty provisions.

Completion Obligations

The share sale agreement will set out a number of completion obligations. These are obligations that you must fulfil, or that the seller must hand over to you at completion. Many of these provisions will relate to the seller ensuring that the shares can be sold and that company approvals have been obtained. In addition, changes of control involving shareholders and directors must be approved.

The following documents are typically included:

– Directors’ resolutions – written resolutions signed by the directors approving the transfer, cancellation or issue of shares, as well as

 the resignation and appointment of any directors;

– Shareholders’ resolutions – written resolutions by which the shareholders approve the share transfer and accept the waiver of pre-emptive rights;

– Waiver of pre-emptive rights – all shareholders will sign this waiver to confirm that they have not

 exercised their right to purchase the shares;

– Share transfer form – setting out the shares the seller is transferring to you and the price you are paying for them;

– Share certificates – the seller’s share certificates will be cancelled and a new share certificate will be issued to you;

– Appointment/removal of directors – a signed resignation from the outgoing director and a signed consent from the incoming director;

Shareholder Rights

If the company has a Shareholders’ Agreement and a Constitution, these documents should be reviewed carefully to ensure that the sale complies with their requirements.

Most companies have a Shareholders’ Agreement, which gives existing shareholders a right of first refusal when shares are being sold or issued. This means current shareholders have priority in purchasing the shares being sold or issued. Where they hold this right, all shareholders selling shares will need to sign an agreement waiving these pre-emptive rights.

Notifying ASIC

Once the share sale is completed, the company must notify ASIC of the changes within 28 days, including changes to shareholders, directors and addresses. This can be done by completing Form 484 on the ASIC website.

Key Takeaways

From a handover perspective, purchasing shares in a company can make taking over a business much easier. Although the share sale agreement is the most important document, there are still many other documents and steps that need to be completed,  in turn evidencing the share transfer. Risks will always remain regardless. The best approach is to conduct due diligence on the company and ensure that any warranty clauses in the share sale agreement help mitigate those risks. Whether you are the buyer or the seller, professional and timely legal assistance is essential.