Share sale and purchase agreements

What is a share sale and purchase agreement?

A share sale and purchase agreement is a legally binding contract for the sale of shares in a company between two people.

Those people may be individuals or companies.

Depending on the perspective of the party drafts the share sale and purchase agreement, the document might also be called a share purchase agreement (abbreviated to SPA), a shares sale agreement, a stock purchase agreement or a shares transfer agreement.

The document sets out the contractual terms under which the deal takes place, including not only details of the shares to be transferred at the agreed price, but also protection for both sides in the form of limitation of liability, warranties, representations, restrictions on the seller, and confidentiality.

A share purchase agreement could be used for the sale of one share or many. To buy or sell the entire share capital in the company, use a company sale agreement template. To buy an unincorporated business, use a business sale agreement template.

What is the difference between a share sale agreement and an asset sale agreement?

With a share sale agreement, you are selling or buying shares (an ownership interest) in a company that owns assets. Those assets could include many different things, from machinery to IT equipment to intellectual property such as specialist software systems.

With an asset sale, you are selling or buying particular identified assets only (possibly one, possibly all of the them). The result is that other property and debts remain in the original business and the assets that you have bought transfer to your business.

If you are buying shares, you'll also consider that the business not only owns assets, but may also have liabilities, whether an overdraft, a loan from another investor or an obligation to fulfil an order. Liabilities offset the value of the assets so that the net asset value of the company is lower than the total asset value.

An agreement for the share of sales will take into account the net asset value of the company. The price for the shares may consider not only what money could be raised if all the assets were sold and liabilities repaid (the liquidation value), but also how much the value of the company might increase over a number of years.

You can use an asset purchase agreement to buy assets from a company, or you can use one to buy assets from a partnership or sole trader.

When should you use a share and purchase agreement?

Although you would most obviously use a share sale agreement template as the basis for your final contract after negotiations have concluded, you can also use one throughout the sale process.

A draft agreement can act as an aide-memoire during negotiations to remind you what may be important to you, but also what may be important to the other side. You may be able to win valuable concessions that the other party hasn't considered. In particular, you may be able to obtain warranties (promises as to the state of something) that protect you without having to give up anything yourself.

When negotiations are coming to an end, but before they are finished, your share purchase agreement template could be used to record heads of terms - the key things that you have agreed on - before adding back additional legal wording.

Terms in a share purchase agreement

Consideration

Consideration is the legal term for the thing being given in return for the company shares. It may be money. It could be something else.

For a sale to occur rather than a gift, there must be 'valuable consideration'. How valuable it is does not matter. Although the value was greater in the past, there are many transactions now concluded for a peppercorn.

However, if the consideration is not small, the purchase price payable by the buyer for the shares is likely to depend on the completion accounts, prior annual financial statements and forecasted management accounts.

Restrictive covenants

Restrictive covenants are restrictions on what the seller may do after the share sale has completed. Typically they include not to be involved in any competing business (known as a non-competition clause) and solicit or poach employees or customers of the company.

To be enforceable, restrictions must be reasonable and must not be a restraint of trade. They should be limited in scope (geographical and function) and in time. For example, trying to restrict the seller from being involved in any business anywhere indefinitely is unlikely to be enforceable. Preventing the seller from being an owner of a business in the same market for five years is more likely to be enforceable.

Warranties

Warranties form the essence of any sale and purchase deal. They protect the buyer, who does not have all of the information available to the seller by ensuring that the seller discloses matters that may materially affect the value of the shares.

It is normal, fair and reasonable for a buyer to demand warranties and for a seller to give them.

There is advantage in being the party who presents the first draft of the shares purchase agreement. The reason is that the person who draws the document decides which warranties to include or exclude.

The buyer could include as many as possible, and force concessions on other points in return for removing a warranty that wasn’t particularly important to them. The seller could reduce the number considerably and hope that the buyer is not aware of what could be included.

The number and scope of the warranties given with each of these documents varies slightly, but most contain around 115, set out in around 15 sections. That may sound an awful lot, but we reassure you that you will need them.

If you are the buyer, you should start with a full set unless you are sure you knows everything there is to know about his proposed acquisition, or the value is very small, or the business is not started. You can follow the drafting notes as to what to delete.

These sale and purchase agreements include a tax indemnity clause (also known as a tax covenant). This gives the buyer an indemnity for all pre-completion tax liabilities in the target company that wouldn't have otherwise arisen in the ordinary course of business (or undisclosed tax liabilities that have not been provided for already in the accounts). Like others, tax warranties are beneficial for obtaining disclosure from the seller so that any issues or risks can be mitigated by using specific indemnities.

Limitation of liability

Limitation of liability clauses limit the amount of damages that one party has to pay the other if the other suffers loss as a result of a breach of the sale contract.

What restrictions are there on selling shares?

Shareholders have a right to transfer their shares to whoever they want. Transfers can happen not only as a result of a sale, but also as a result of a gift or an inheritance.

However, shareholders can agree amongst themselves that the company or other existing shareholders have rights to buy the shares of another shareholder before they are sold to anyone else (known as a right of preference, a right of pre-emption or a right of first refusal) or they can agree that some rights only apply to qualifying shareholders and that new shareholders may not qualify.

These rights may be recorded in the articles of association of the company, which is a public document held at the Register of Companies. However, they may also be recorded in a shareholders' agreement, which is private.

So when buying shares, you'll want to ask whether there might be any restrictions either in the articles or a shareholders' agreement that prevent the transfer. You might also include a warranty that there are none.

The right deal framework for you

The seller may have to pay capital gains tax (CGT) on the increase in value of the shares while they have held them. We suggest that you seek advice from an accountant on how to structure the sale so as to minimise the overall taxes that the seller pays.

While you shouldn't avoid the seller paying tax when selling company shares, you may be able to take advantage of tax allowances for such a transaction, and possibly over several tax periods (for example, conducting two distinct share sales over two periods).

Using a shareholders agreement in conjunction with a shares sale agreement, you can give an incoming buyer greater rights in voting decisions for a limited period of time.

Completing the transfer

After signing and dating the agreement, the contract will be legally binding. You don't need approval from a solicitor. However, the obligation to transfer the shares or payment might be subject to other events such as payment of stamp duty, holding meetings required to approve the transfer (if directors or shareholders have a right to veto it), filing of notices and integration into the acquirer's business. Completion arrangements are covered in the document.

Do you need to file the share sale agreement with a Register of Companies?

A share sale agreement is a private document. There is no requirement to file it with a Register of Companies.

You only need to inform the relevant Register of Companies of a change in ownership of shares.