When a shareholder wants to raise funds, establish a new company, end a relationship with other shareholders, or retire, they may choose to sell the shares they hold. When buying or selling shares in a private company, the most important step is entering into a share sale agreement to protect your own interests. So what exactly is a share sale agreement? What clauses does it involve? When you buy or sell shares in Australia, how can you protect your interests and complete the transaction smoothly? Today’s article gives you the best answer.

1. What is a Share Sale Agreement? What are the key clauses?

A Share Sale Agreement is an agreement used to determine the transfer of share ownership from one shareholder to another. It sets out the rights and obligations of the buyer and seller, the actions each party must take, and when and how those actions are to be carried out.

A share sale agreement should include the following clauses:

• Parties: the participants in the transaction
• Shares: the number and type of shares being sold
• Purchase price and adjustments
• Pre-sale conditions: what should happen before the sale
• Completion: how the sale will be completed
• Warranties and indemnities: how risk is allocated
• Limitations on liability: restrictions on claims against the seller
• Post-completion obligations: including restraint clauses
• Dispute resolution and termination

2. How are the “Parties” defined in a Share Sale Agreement?

The participants in the transaction should all be parties to the share sale agreement. If the entire share capital of the company is being sold, then all shareholders need to be parties to the agreement. If the company is wholly owned by a single shareholder, then that shareholder is a party to the agreement.

However, if one side of the sale agreement is a “shell” company (i.e. with few or no assets), you should require the owner of the company to act as a guarantor. The guarantor’s involvement will help minimise the risk of the transaction. For example, if there is a problem with the transaction and you make a claim against the other party, and that company is unable to make the payment, the guarantor will fulfil the indemnity obligation.

3. How are the shares defined?

The share sale agreement will list the number and type of shares each shareholder is selling. Because different share types may carry different rights, it is very important that the buyer understands the type of shares they are purchasing. For example, ordinary shares, non-voting shares, redeemable shares, and so on.

4. How is the “Purchase Price” defined in a Share Sale Agreement?

Regarding the purchase price, the share sale agreement should include:

• The purchase price of the shares;
• How the price is calculated; and
• How the buyer will pay.

For a simple share sale, the purchase price may be a fixed amount paid in cash on the day the sale completes.

More complex transactions occur after completion of the sale:

• Entering into the share sale agreement;
• Satisfying certain conditions;
• Adjusting the price to account for costs (such as licences and council rates) and employee entitlements, ensuring they are allocated to the correct parties.

In addition, the buyer has the right to pay the purchase price by:

• Issuing an equivalent quantity of shares to the seller; or
• Issuing shares in instalments after completion of the sale (this is where a guarantor comes into play, to ensure the instalments are paid in full).

5. What do Pre-sale Conditions in a share sale include?

Your share sale agreement should state: whether there is any action that needs to occur before the share sale. Let’s take a common example — before a share sale, key contract holders (such as suppliers critical to the business) are usually required to consent, when the company transfers to the buyer, that they will not terminate their contracts. This is known as a ‘change of control’ consent.

Once the parties have agreed on the pre-sale conditions, the buyer and seller can sign the agreement, committing to the share sale. The parties then need to satisfy the previously agreed pre-sale conditions before the sale can complete. This is commonly referred to as a “split exchange and completion”. If the specified conditions are not met by a specific date, either party has the right to walk away from the transaction.

In a “split exchange and completion” situation, it is usually required that:

• The seller agrees to continue operating the business in a manner that maintains its profitability; and
• Confidentiality obligations are observed, i.e. the parties must keep the sale confidential until completion. This clause may specify when and how the parties will announce the sale to the market, any key suppliers, customers or employees.

6. What is completion of the sale? What should the Share Sale Agreement stipulate?

Once your shares are transferred to the buyer, the sale is considered complete. The share sale agreement should clearly set out when, where and how the sale of the shares will be completed. This includes describing how the parties will properly transfer the shares, and describing any documents the seller must provide to the buyer.

The share sale agreement should also state: what happens if the sale does not complete by the agreed time. For example, whether the buyer must pay interest on the purchase price, or whether the parties can walk away from the sale.

7. What do “Warranties and Indemnities” in a Share Sale Agreement refer to?

The share sale agreement helps to adjust and allocate the risks of each party, and therefore needs to include warranties and indemnities.

Warranties: the seller may give warranties about matters relating to the business. Incorrect warranties may lead to a breach. For example, as a seller you might state that your business owns the intellectual property in a certain area. If in fact the business does not own that intellectual property, the buyer may claim for any loss suffered as a result of the breach of warranty.

Indemnity: this is a contractual obligation by one party to compensate another party. It mainly provides additional protection for the buyer. For example, employees may make a claim against the company for certain reasons, where the cause of the claim occurred before completion of the share sale, but the claim itself is made after completion. That is, the buyer must compensate the employees, but the buyer did not actually cause the issue that gave rise to the claim. In this situation, the seller will indemnify the buyer to cover the buyer’s loss.

8. What are the Limitations on Liability?

As a seller, if you breach any warranty or indemnity clause, you may be required to bear liability. To minimise this liability, the share sale agreement can include certain limitations.

Typical limitations include the following:

• The buyer can only make claims against the seller within a certain period; and
• Claims can only be made up to a certain amount (usually capped at the purchase price received).

9. What obligations must the seller fulfil after the share sale?

The share sale agreement should set out in detail: how the seller must act after the sale. For example, an important clause is “a restraint of trade clause”. This clause can prevent the seller from engaging in a competing business for an agreed period of time. This clause also gives the new buyer space to grow the business they have purchased.

Another typical clause is whether the seller must provide any assistance to the buyer after the sale. For example, whether the seller will continue to work for the business or provide consulting services to it. This involves whether an ongoing relationship is formally established in a separate agreement, such as:

• An employment or consultant agreement;
• A transitional services agreement; or
• A shareholders’ agreement (if the seller retains partial ownership of the company).

10. On disputes and termination, what should the Share Sale Agreement stipulate?

Disputes may arise during or after the sale. For example, the parties may disagree on the amount of any adjustment to the purchase price. To ease such situations, the share sale agreement should clearly set out a procedure that the parties must follow, so that disputes can be resolved quickly and cost-effectively.

Similarly, the share sale agreement should provide for when the parties may terminate the sale if the dispute resolution process fails. Termination clauses should also address the consequences of terminating the sale — that is, whether the parties can walk away from the sale, or whether anyone should receive compensation.

Final thoughts

Entering into a share sale agreement helps to minimise the risks involved in the sale of shares in a private company. In a share

sale agreement, including the key clauses will not only protect your interests but also ensure the sale completes smoothly.

A good, professional share sale agreement will help you resolve many known issues and avoid potential risks.

Because a share sale agreement needs to cover numerous clauses and provisions, all tightly interconnected, and if the parties have

a dispute in the future, this agreement may serve as direct evidence, so when it comes to drafting or reviewing a share sale agreement,

you can seek professional assistance to maximise your protection and leave nothing to chance!