Share purchase agreement overview
At its most basic, the share purchase agreement specifies the amount, schedule, and method of payment as well as representations and warranties of the buyer and seller to each other.
While it may sound simple, there are a host of complexities that can and do arise as part of the process. These can include:
- These are the key protections for the buyer if the company is not in the condition it has been presented
- Purchase price adjustments
- Post-completion restraints on the seller’s activities.
It is these issues that can cause the most problems and why a sound share purchase agreement is so important.
As a guide, we have provided an overview of some key areas to consider. As always, professional and experienced legal advice can help ensure the purchase process moves smoothly and that any potential legal issues or exposure are minimised.
The issue and subsequent negotiation on warranties often come from items that have been discovered in the buyer’s due diligence process. While sometimes an issue may have been disclosed by the seller (in the disclosure material), many times this is not the case so a carefully worded warranty or warranties in the share purchase agreement is essential for buyer protection.
2. Planning for completion
There is usually a plethora of documents that need to be provided at sale completion, particularly if the sale involves a large group of companies being sold. There are banking and finance documents such as releases of security interests, replacement of guarantees and third-party involvement. These documents, issues and ‘consents’ to change control, can complicate completion day requirements. In these cases, it is strongly recommended you speak to your legal representative well in advance so they can identify and ‘dry run’ the process well ahead of completion to identify possible issues and adjust the agreement or process as needed.
3. Engaging an accountant
As this is ultimately a numbers game, the advice of a recommended accountant is highly valuable. They can add great value to the share purchase agreement and provide the buyer assurance they are receiving a fixed level of working capital or a fixed value of assets of the business at completion. It also helps the seller knows how much cash they can take out of the business before completion through avenues such as dividend payments.
As with a share sale agreement, a restraint clause is also recommended in a share purchase agreement. The starting point for this needs to be a consideration of what is really needed to protect the goodwill the buyer is paying for as part of the purchase price. Restraint clauses can be complex and as such, require legal input to ensure they cover all areas fairly and equitably for both parties.
5. Tax implications
Tax always come into play as part of a share purchase process. While a tax adviser may provide certain advice, it’s important you also have a clear understanding of the tax-related drafting in the agreement itself. For this, a legal opinion is highly recommended. The more aware you are of potential tax issues throughout the process, the better protected you are against unknown and unforeseen tax implications.
These are but a few considerations in the drafting and implementation of a share purchase agreement. As it is an agreement that crosses multiple professional industries – from legal and accounting to the tax office – it is imperative that if you are not sure about any area, talk to a professional legal representative as they will understand the drafting and legal nuances of the agreement.
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