What Is A Share Purchase Agreement?
We often get asked what exactly a Share Purchase Agreement is. This blog provides a short guide to the purpose of such agreement and the advantages and disadvantages of entering into one.
A Share Purchase Agreement documents the terms relating to the sale and purchase of a company’s shares.
None of the contracts already in place will change, all that changes is that an individual makes a complete break from the company relationship. The potential purchaser may however insist on a few “promises” from the seller which will continue following the sale. These are known as warranties.
A share purchase agreement will generally include the following points:
- The party’s details – It is important that the correct individuals are noted as being either the purchaser or the seller.
- Consideration – The parties will have agreed to a “price” for the transfer of the shares. It is important that this is documented together with the date in which payment must be transferred.
- Warranties – These are contractually binding statements which could affect the purchaser’s decision to buy the shares. They act as a comfort to the purchaser that there are no underlying issues with the sale.
- Restrictive Covenants – These provide certainty to the purchaser knowing that the seller may not be able to compete against them for a period of time. This is known as a non-compete clause and can also extend to a non-solicitation clause which stops the seller from contacting the purchaser’s customers, employees or supplies.
- Indemnities – The seller may provide an indemnity to the purchaser that if there is any outstanding litigation or issues with the company. These issues are usually found during the disclosure process; however, it is an additional security to confirm that there will be no surprises once the sale completes.
The advantage of a share purchase agreement is that the intentions of the parties are documented in a legally binding contract. There is often no need for the involvement of third parties.
The disadvantage is that the purchaser is taking a risk in that they may inherit problems that exist in the company following the sale.
If you require further advice or assistance on share purchase agreements, contact our Corporate Law Department who will be happy to help.
Written by Sophie Murgatroyd